Hello. This is Jeremy Richardson from the RBC Global Equity Team here with another update.

Now, I think psychologists refer to an individual’s ability to believe two mutually contradictory things simultaneously is cognitive dissonance. And we’ve got a little bit of that within the equity markets at the moment, I think, in its response to the news that the Omicron variant isn’t likely to be as disruptive as some of the earlier variants.

That’s leading to two things. The first of which is the reappearance of the reopening trade. Now, we saw a little bit of this back in 2020, as you’ll recall, when business models that were most heavily impacted by the pandemic the first time around got a lease of life as the prospect of normalization of society meant that the prospects of returning to profitability improved. And so, we saw hospitality stocks, travel, restaurants, leisure; these types of business models do particularly well. We’re seeing something of that as we enter the beginning of the new calendar year.

But on the other side of the ledger, we’re also seeing perhaps a more cautious tone from investors at the same time. Because with the passing of the period of maximum concern over the Omicron, it’s allowing now investors to consider the prospect of normalization of monetary policy in the face of what looks as though it’s still quite elevated inflation statistics.

Now, rising interest rates is actually causing a number of—a bit of disruption within capital markets generally. We're seeing a little bit of that in the bond market, but also, that’s feeding across back into the equity market as well, as many investors fearing for their ability to generate income by investing in bonds are actually looking for equities instead.

And so we’re seeing some relative strength at the moment from dividend-paying stocks, but also, perhaps more sort of somewhat defensive business models and things like consumer staples, utilities, and so on, which seems somewhat strange given that interest rates are actually rising, that these sort of defensive areas should be doing so well.

And that’s actually perhaps more of a cautious feel to equity markets. Although equity markets have been doing quite well, they had a very positive year in 2021 and even December, they were up by over 4% in MSCI World, so to say. This sort of more cognitive dissonance between the optimistic take of the reopening trade followed by the more sort of dividend-paying, cautious relative strength we’re seeing in some other areas doesn’t sit nicely side by side; they sort of seem mutually contradictory somehow.

Trying to look ahead, though, I think one of the things we might be able to say is that the reopening trade, if we think back to how that was characterised the first time we saw this back in 2020, it didn’t seem to last very long. The market was very quickly able to reprice the new opportunities coming from normalisation, and it’s likely, I think, that then we’ll see that sort of short-duration sort of repricing effect again this time around. Reopening trades don’t seem to have a lot of duration to them. Once you’ve reopened, you’ve reopened.

But the other side of things, that normalization of monetary policy, that does have the potential to be a little bit longer lasting, given that there seems to be a bit of a debate still that’s about how far inflation is going to go and the level of interest rates needed in order to be able to address that.

Now, the positive thing is that we are beginning to see some signs that these inflation pressures are beginning to dissipate. Don’t want to overstate them, just to sort of tell a few little bits of information around things like survey data and such, like movement of supply chains, shipping containers, et cetera, which are showing some encouraging signs that maybe the worst of the inflationary pressures are now behind us.

And, of course, we should also remember that, as consumption shifts from that sort of festive period of consumerism towards more experiences, as we go forward into the new calendar year, driven in part by the reopening of society back to that reopening trade, then it may remove some of the pressures in terms of aggregate demand, which the supply chains were really struggling to catch up on. So this sort of shifting of consumption patterns away from stuff towards experiences may actually also remove some of those inflationary pressures.

That actually could be quite a constructive sort of market environment for investors. And it may be the case that, as we sit here today, that we might be experiencing the maximum period or the peak period of macroeconomic uncertainty. Certainly, I think a lot of investors will be keeping their fingers crossed that that will be the case as we go through the balance of the calendar year.

I hope that’s been of interest and I look forward to catching up with you again soon.