June 16, 2017

DNCA's weekly market outlook by Igor de Maack

Management comment

Markets remained unsettled by the oil price. Although indicators were all denoting a sustainable increase in the price of crude, the opposite occurred, despite the decline in US oil reserves and the OPEC decision to extend output quotas along with Russia, while credit lines to the US shale oil & gas industry appeared to be drying up. The number of US rigs continues to increase however and oil stocks are taking longer than anticipated to deplete. Furthermore, an increasing number of measures to promote energy transition, particularly in the automotive sector with the adoption of electric vehicles, have failed to stimulate demand for the time being. Forecasting future oil prices is therefore a highly difficult exercise.

For European importers, a steady oil price would strengthen consumer spending which is becoming more dynamic, even in Italy where the IMF revised its 2017 GDP growth forecast upwards to 1.3% vs 0.8%. In the US, the Fed raised its base rates as expected by 25 basis points to 1.25%. 

The US central bank appears less concerned than the markets regarding the health of the domestic economy, as investors perceive a possible downturn in growth outlook given the slowdown in inflation. Warren Buffet, often quoted but never imitated, said “if I were stranded on an island and able to look at only one data set, I would choose the weekly rail volumes”. And what do the statistics from North American railroad operators tell us? During week 23, freight volumes improved by a further 8.3% and extended the steady increase observed since the beginning of the year. Although the automotive industry is certainly less dynamic, other sectors remain on a steady footing, including construction materials, coal, industrial products and agriculture. Although the US economy continues to expand modestly, serious doubts are looming in the minds of investors, which have driven 10-year Treasury bond yields back down towards levels last seen in November.

These fears, in conjunction with the inflated multiples among certain overcrowded sectors, such as tech stocks and political incertitude regarding Donald Trump’s inability to reform or lead his country, along with the difficulties or even hesitation faced by the UK in launching the Brexit process, have logically led to a market correction, which may last several more weeks and provide a more attractive investment opportunity among European equities.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in June 16th, 2017.

This promotional document is a simplified presentation and does not constitute a subscription offer or an investment recommendation. No part of this document may be reproduced, published or distributed without prior approval from the investment management company.

DNCA Investments is a trademark held by DNCA Finance

Markets remained unsettled by the oil price. Although indicators were all denoting a sustainable increase in the price of crude, the opposite occurred, despite the decline in US oil reserves and the OPEC decision to extend output quotas along with Russia, while credit lines to the US shale oil & gas industry appeared to be drying up. The...
2017-06-16