July 22, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

To continue our commentary in the wake of the Brexit, let us begin this review with a quote from Winston Churchill, the greatest modern-day English statesman. Churchill said “saving is a fine thing, especially when your parents have done it for you”. However, will the children and grandchildren of today’s parents be able to say as much, given the current remuneration rate among fixed-income savings? Probably not, as interest rates have reached levels which are jeopardising global savings and retirement pension systems. Equities, particularly in Europe, are now paradoxically considered as a high-yield fixed income investment (yielding around 3.5%). However, this rationale is not strong enough to justify buying into an asset class considered too risky and too volatile. Last week saw record outflow from funds invested in European equities.

On the other hand, emerging debt received record subscriptions during the same period. Political rather than economic fears are at play, although the two are frequently interwoven. The Brexit has threatened the survival and unity of the European Union, while the brutal repression following the military coup in Turkey could also menace unity within NATO. Investors will nonetheless try to put political issues aside for a while in order to focus on microeconomic data.

Initial half-yearly earnings releases have so far been relatively healthy, but the reporting season has only just begun and has provided no clear guidance concerning macro and microeconomic growth forecasts for 2017. Meanwhile, 2016 is likely to remain a recovery year for the eurozone, while US growth appears resilient, with GDP reaching a record high, along with the stock market. Investors will begin anticipating 2017 from September onwards. The monetary environment is likely to remain distressing, unless the US hikes its rates unexpectedly. Yield-assets are offering only very low remuneration, whereas productive risky assets are generating yield. Last Thursday’s ECB meeting revealed no hint of any intended intervention by Mario Draghi, particularly on the awkward topic of the Italian banks. Certain investment management strategies are currently proposing short-selling bond products. Although this approach makes sense at these price levels, the best way to short-sell the bond market is by borrowing cash and not by selling debt...for investors who can still afford to do so.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 22nd, 2016.

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To continue our commentary in the wake of the Brexit, let us begin this review with a quote from Winston Churchill, the greatest modern-day English statesman. Churchill said “saving is a fine thing, especially when your parents have done it for you”. However, will the children and grandchildren of today’s parents be able to say...
2016-07-22