June 03, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

With some opinion polls in favour and other opinion polls against, the Brexit referendum is a constant topic of daily newsflow in the financial markets. Bookmakers and hedge funds have already placed their bets. Although the outcome on the 23 June will call for a swift reaction, ultimately nothing will happen on the following day in economic terms, as in the event of a Brexit, the divorce and remarriage with the European Union will be a long and arduous process. Brexit fears have already weighed on the UK economy, which recorded one of its worst quarters in many years, with underlying weakness in the currency.

In China, the shadow banking situation, which we discussed with the Bank of China during our trip last week, is still unclear. The Chinese central bank must now resolve to tackle online funding which covers a range of themes, from financing wedding banquets to vast mining projects. Certain sources allude to a shadow economy totalling USD 8,000bn. The central government has started to address this issue, but as we mentioned in last week’s letter, everything in China is disproportionate. The open short position in the Hong Kong equity market seems to be growing, which a sign of nervousness. The Chinese authorities do not wish to lose control of monetary stability and financial flows. 

In Europe, the recovery still appears to be underway in spite of everything (immigration crisis, terrorism and strikes, particularly in France). The latest vehicle registration figures for May were excellent, notably in France (+22.3%) and Spain (+20.9%). Of course, several key political events are looming on the horizon in Europe, but these surely are a necessary feature of a democracy. Financial markets will undoubtedly find reasons to ignore the compelling argument for investing in European equities, particularly when comparing net dividend payout with bond yields, even in the high-yield market. Further phases of volatility are to be expected.

In the same way as the majestic Seine looping through Paris is currently threatening to burst its banks, life in the financial markets is decidedly unlike a sleepy winding river.
 
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in June 3rd, 2016.
 
 
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With some opinion polls in favour and other opinion polls against, the Brexit referendum is a constant topic of daily newsflow in the financial markets. Bookmakers and hedge funds have already placed their bets. Although the outcome on the 23 June will call for a swift reaction, ultimately nothing will happen on the following day in economic...
2016-06-03