May 26, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

The CEO of a major financial institution hosting a seminar in China has coined a new acronym to describe the current instability among global markets. FOCBT denotes the five sources of volatility which will capture investors’ attention over the next few months. The initials stand for Fed, Oil, China, Brexit and Trump. An acceleration of the Fed’s US rate-hike programme represents the main risk (or opportunity moreover) for bond and equity markets. A return to normal would undoubtedly signify the end of the crisis which began in 2008 and the purge of past monetary excesses.

Oil has almost doubled in price since its recent lows. Surplus supply is slowly being resorbed and demand remains firm. Some analysts are already (!) beginning to evoke a fresh crisis involving a surge in the oil price. Stability in the commodities market always represents a positive factor, permitting buyers to calibrate their medium-term investment programmes more accurately, provided that prices remain stable.

China, which we visited last week, has already been the topic of extensive commentary. Economic indicators from a broad range of private and public sources have confirmed, with unexpectedly arbitrary lucidity, the economic slowdown and structural adjustments underway, and the fight against corruption among bureaucrats. The impact of the latest monetary and regulatory stimulus measures is starting to fade. China’s chaotic urbanisation programme represents the greatest demographic, economic, social and environmental challenge in human history. The burden of responsibility which now lies with Chinese leaders is not only heavy, but global.

Financial market professionals dare not even imagine the possibility of a Brexit, despite the opinion polls remaining on a knife-edge, as a British departure from the European Union would be highly complicated to organise. Although a vote in favour of a Brexit would be devastating, the EU is not synonymous with the eurozone. However, the risk of contagion must not be underestimated, threatening the spread of Eurosceptic sentiment throughout other countries which have suffered during the crisis.

Trump and his Democrat opponent Sanders have enlivened the primaries, delighting the media with their non-conformist, eccentric and sometimes grotesque rhetoric. This is almost standard procedure for the primaries however. It would be tempting to say "what goes in the primary elections stays in the primary elections". The American public nonetheless seems eager to embrace the theme of anger, or even extremism, as a rejection of elite political dynasties (Kennedy, Bush, Clinton?) which undoubtedly fuelled US growth, but in doing so distorted the social pyramid by increasing inequalities.

Although none of these are new themes, bundling them into a single acronym nonetheless provides a neat snapshot of the volatility currently affecting equity markets which, against all expectations, staged a mini-rally this week.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 26th, 2016.

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
The CEO of a major financial institution hosting a seminar in China has coined a new acronym to describe the current instability among global markets. FOCBT denotes the five sources of volatility which will capture investors’ attention over the next few months. The initials stand for Fed, Oil, China, Brexit and Trump. An acceleration...
2016-05-26