July 08, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

After the Brexit claimed its first two victims, namely sterling and European equity markets, UK property assets have now also been hit by a liquidity crisis, as redemptions were suspended in a number of established open-ended funds with some GBP 15 - 20bn in AUM. This served as reminder that valuation bubbles in all asset classes ultimately deflate. An asset can only qualify as a safe haven if its valuation remains correlated to tangible fundamentals. The scramble among investors to bail out of this sector is also partially attributable to the generous capital gains recorded after years of rising net asset values (NAV). Unlisted and residential UK real estate could therefore become the next victim, which would portend a national economic crisis.

Property and economic crises generally occur in tandem and tend to snowball in unison. A striking parallel can also be drawn with sovereign debt issued by European Union members, as 55% of these bonds are yielding negative rates. Furthermore, 31% are no longer eligible for the ECB repurchase programme, representing a total outstanding of EUR 2,300bn.

For the Italian banks, “slow progress...is no progress”. Much time has been wasted in tackling the accumulated EUR 360bn of non-performing loans (NPLs) parked on the banks’ balance sheets, firstly in creating the Atlante bailout fund, and then finding a solution to the highly regionalised and fragmented banking system inherited from the Renaissance period. Investors are left wondering what form the recapitalisation of the financial institutions will take and also harbour doubts regarding political stability in Italy.  Will there be a bail-in financed by shareholders, creditors and savers, or a bailout underwritten by the Italian state, disregarding all of the new banking resolution rules, or simply the dismissal of Matteo Renzi following this autumn’s parliamentary reform referendum.

Concerns of systemic risk spilling over from the UK are currently exacerbated by fears of systemic Italian risk. Once again, and as always, it is Europe which holds the keys to appease the financial markets. The tranquillity of the summer months will probably once again be disturbed by some harsh winds of panic.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 8th, 2016.

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After the Brexit claimed its first two victims, namely sterling and European equity markets, UK property assets have now also been hit by a liquidity crisis, as redemptions were suspended in a number of established open-ended funds with some GBP 15 - 20bn in AUM. This served as reminder that valuation bubbles in all asset classes ultimately...
2016-07-08