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Inflation, Volatility and Risk – Is This a CTRM Software Supercycle?

We quite often read about a commodities super cycle. The investment bankers seem particularly fond of the term. But does that translate into a CTRM software super cycle as well?

Inflation rates are creeping up globally. India’s WPI inflation rates hit 14.5% for a four month high recently while in the USA it accelerated to 8.5% in March 2022 and averages 7.4% across the Euro area as of the same period. Here in the Czech Republic, it is 12.7% as of March 2022. Much of this is driven by energy prices including electric power, natural gas and crude oil but gradually, those energy prices are creating inflationary pressures everywhere. In India, “The high rate of inflation in March, 2022 is primarily due to rise in prices of crude petroleum and natural gas, mineral oils, basic metals, etc owing to disruption in the global supply chain caused by the Russia-Ukraine conflict.” the Commerce and Industry Ministry said in a statement. Not all countries are impacted to the same degree with countries like China, Japan and Switzerland all under 3%. In fact, parts of Asia-Pacific, the middle east and Africa continue for the moment to have relatively low inflation rates.

As the US Federal Reserve appears to be signalling an increase in the rate of interest rate increases, it seems likely that this will cause a strengthening of the US Dollar against certain other currencies like the Yen. A rate increase of perhaps 0.5% is expected in the coming weeks and other central banks in the west appear poised to raise interest rates as well. Meanwhile, the IMF updated  its World Economic Outlook stating that global GDP will likely expand by only 3.6% this year and next. That was a lowering of 0.8 percentage point and 0.2 percentage point, respectively, from the IMF’s previous GDP outlook published last December. It also raised its inflation expectations to an average of 5.7% this year across advanced economies, and to 8.7% for emerging economies. Meanwhile, commodity prices remain broadly high and very volatile. A stronger dollar will help push prices higher in other currencies as well.

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It seems trite to suggest that at times like these, a holistic approach to managing risks and exposures is needed yet it remains true. Issues like liquidity and cash/FX management are likely high on the agenda along with market and price risk management. Since everyone is impacted, counter parties are also vulnerable and so credit risk management is also key. Equally, with supply and supply chain disruptions due to geopolitics, operational and supply chain risks need to be managed. And all of this while keeping an eye on developments on the carbon and ECG side of things where there is likely to more and increasing regulation. The current market ought to be driving interest in all types of transaction and risk management software but in particular, risk tools and analytics. Indeed, most vendors we talk with are suggesting that there is much demand for new software in the market yet, unpredictability and an emphasis on having to more carefully manage cashflows and businesses in general can act as a counterweight to this increased demand meaning that interest doesn’t turn into actual deals.

While pipelines are filling and full, and sales activities run at maximum, the uncertainty around where things may be headed combined with ensuring profits are maximised on one side of the industry and costs contained on the other, means that there may well be a lot of tire kicking and curtailed projects in plat as well. As Q2 ticks away, we will get a better feel for which way things are headed…..