May 13, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

As Greece once again features on the European agenda to discuss lightening its debt burden, it may be useful or even constructive to refer to the major Greek thinkers to help decipher global economies and markets. At a time predating mathematical sciences, the philosopher Zeno of Elea expounded theories which defied the rules of logic and factual evidence. One of his best-known theories is the dichotomy paradox. Also known as the stone paradox, its principle is a simple one. When a stone is thrown at a tree a given distance away, once the stone has travelled half of the distance remaining to reach the tree, the other half of the distance still remains to be covered. The stone will therefore never reach its target, as there will always remain a further half of the distance to be covered, albeit infinitely small. However convincing its logic, the argument can be easily disproven however, as we have all managed to hit a tree with a stone sometime during our childhood. Investors on the other hand, particularly US and UK pension funds, are applying precisely this way of thinking to economic growth in the eurozone.  They appear to believe that the region will never be able to achieve a satisfactory pace of growth, despite the recurrent evidence from repeated quarterly indicators, which explains why they are shunning European equities, after 13 consecutive weeks of net capital outflow from this asset class.

However, the eurozone is the only monetary region which can boast a macroeconomic outperformance over the past year. Pessimists argue that the bullish impetus provided by external factors (cheap oil, weak euro and low rates) will progressively peter out, sounding the death knell for the timid recovery. Internal drivers have nonetheless taken over as a growth relay, even in France, including strong domestic demand, a rapid increase in demand for new loans, unemployment falling almost as sharply as in the US and a snapback in capex.

The UK referendum remains a stumbling block which could derail the positive trend, but for the time being, neither a potential Brexit, nor the immigration crisis or even the terrorist attacks have disrupted the economic momentum in the eurozone. Of course we do not have a naïvely optimistic view, as there are a number of political deadlines approaching in the region, with a range associated risks.

Meanwhile in Brazil, a fresh page has been turned, with the Senate voting the impeachment of Dilma Rousseff, although we have not been completely reassured regarding the political meanderings yet to be announced in the only Portuguese-speaking democracy in South America. At least, local politicians and economic lobbies are now aware of the disastrous impact of this saga, resembling a TV soap opera, which soon had to come to a (happy?) end. An increase in our weightings in Brazilian stocks, particularly in the Infrastructures fund, has been programmed since the beginning of the year and it is perhaps not too late to continue increasing our exposure. The unelected interim government must nonetheless avoid making any blunders regarding the application of the challenging reforms which need to be implemented.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 13th, 2016.

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As Greece once again features on the European agenda to discuss lightening its debt burden, it may be useful or even constructive to refer to the major Greek thinkers to help decipher global economies and markets. At a time predating mathematical sciences, the philosopher Zeno of Elea expounded theories which defied the rules of logic and...
2016-05-13