July 15, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

Terra incognita....these two Latin words featured on ancient maps used by explorers to designate lands which remained unchartered by modern man. Financial markets have also recently ventured into the inhospitable unknown. Interest rates of progressively longer maturities are slipping into increasingly negative territory in more and more countries. On the political front, the Brexit referendum has also created an institutional “void”. Europe is now ensnared by these referendums which have become more like ultimatums brandished before the Brussels hierarchy: 1/ Greece last year to obtain financial eurozone concessions; 2/ the UK in June to gain dispensation from the free movement of people rule; 3/ soon, Italy threatening an internal crisis in order to negotiate the refinancing of its banking system using public funds. Although Europe is therefore facing a major health-check, however incomplete and imperfect it may be, it nonetheless exists and offers a discussion framework for a set of rules that may be slackened as a temporary pragmatic measure. None of them are offered by the unknown and political vacuity vaunted by populists. Equity markets are currently trading in thin volumes due to the holiday period. The indices are nevertheless posting gains, with the S&P 500 in the US recently breaching its all-time high, as though making a mockery of the UK’s fickleness.

Paradoxically, even in Europe, equity markets rallied despite net outflow from this asset class over the past five months. This observation would imply that the current buyers and sellers are marginal players and that the market may fluctuate brutally on the downside or on the upside within a 5 - 10% trading range. The macroeconomic climate has not radically changed. It is too early to clearly identify the negative impact of the Brexit on the eurozone economy.

The investor, in unchartered territory, like the explorer, is often isolated and in danger. For this reason, medieval cartographers sometimes included another Latin phrase on their maps, “hic sunt dracones”, i.e. beware of dragons here...

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 15th, 2016.

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Terra incognita....these two Latin words featured on ancient maps used by explorers to designate lands which remained unchartered by modern man. Financial markets have also recently ventured into the inhospitable unknown. Interest rates of progressively longer maturities are slipping into increasingly negative territory in more and more...
2016-07-15