Markets drifted during the last “vacation” week, in anticipation of a more turbulent period after the summer recess. Although business confidence indices in France (PMI) and Germany (IFO) came in relatively weaker during August, indicators for the two leading eurozone economies were broadly satisfactory. Germany continued to post a surplus (€18.5bn in June) and the unemployment rate in France fell slightly again in July, with 19,100 fewer job seekers. Growth in the eurozone appeared steady, while the US remained firm and the Chinese economy did not collapse. The rally and ensuing stability among commodities prices (particularly oil) also bodes well and reduces the risk of an emerging commodities-producing economy imploding, for the time being. The price of nickel has gained 15% since the beginning of the year, while the Nyse Arca Steel Index has rallied almost 50%. Although global trade data has not accelerated, these factors confirm that the general macroeconomic situation has stabilised. With strong support from the central banks, a number of companies have benefitted from historically low financing costs to launch earnings-accretive M&A deals, including Téléperformance/LLS, Syngenta/ChemChina and Pfyzer/Medivation.
There have also been rumours of a tie-up between Linde and Praxair, with the potentially merged entity surpassing Air Liquide as global leader. Political issues, rather than economic concerns, have cast a shadow over the landscape however. The US elections are approaching and a series of sobering opinion polls have been published in countries such as Italy and France. As is frequently the case, investors are finding fear-provoking reasons to justify an increasingly reticent attitude towards equities, particularly in Europe. Disillusionment is certainly increasing among electors within developed democracies, regarding politicians who are often disconnected from everyday reality or lack integrity. In terms of investments, the real risk appears to be among bond markets due to an unexpected surge in inflation. If the sharp wage rise in the US is confirmed (+2.6% average hourly rate), the Fed may be obliged to adjust its monetary policy more rapidly.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in August 26th, 2016.
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