Betting on the markets is betting on growth. That extra 1% GDP growth can translate into significantly higher corporate profit growth. The last 3 years have been lacklustre in terms of economic progress. If you notice even today our economy has not reached the pre-COVID level of growth. Growth is expected to return, but stock markets have already risen to all-time highs in anticipation of that growth. The question to ask is what does the market see which economists and other experts don’t?

The stock market sees that in every sector there is the creative destruction of capacity. We are seeing energy-inefficient plants shut down, polluting businesses shut down, financially weak traders shut down, and weak service establishments shutting shop. Naturally, the efficient ones are rewarded with superior financial performance. This financial performance is not something that they have earned, but it is something that their competitors have given up. However, that phase of gaining from weak competitors is over.

You need headline growth. Growth that is higher than the pre-COVID level. Growth coupled with well-controlled inflation is what the markets need to sustain at these levels. However, it is not going to be easy to find such growth. The party pooper is going to be inflation. A lot of time will be spent on taming inflation. Battling inflation will mean ceding growth. While we have gained from efficiency in the toughest of times, the gains coming from growth will need to wait.

The efficiency trade is over. The growth trade will be prolonged.

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Posted on October 16, 2021
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