October 14, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

Economic misuse is like the excessive consumption of alcohol, there is the inevitable morning after, said John Kenneth Galbraith, the well-known economist who was also US ambassador to India from 1961 to 1963. Likewise, financial misuse, or rather excessive consumption of bonds, will also lead to an inevitable morning after. Investor appetite remains strong for this asset class, ploughing in more than USD 33bn this year, i.e. a total of USD 158bn now held in investment-grade bond ETFs. Fear of a recession, fear of a poor set of figures from the Chinese economy, fear of permanent deflation, fear of a stock market crash, fear of political events, fear of armed conflict, at the moment everything seems to justify this inexorable reallocation.

However, investors may end up with a painful case of indigestion if there is a shift in the bond market landscape. This explains why the central banks are so uneasy about making any changes to their monetary policy. The commodities price rally will drive inflation indices higher. The widespread resurgence of protectionism around the globe could also halt the strong deflationary trend which began with the onset of globalisation. There will be much further cause for hesitation between now and the end of the year. Macroeconomic outlook for 2017 will begin to haunt investor sentiment, which is increasingly torn between a bearish scenario for financial assets and hopes for positive real yields from tangible assets in the form of corporate ownership securities.

For the time being, funds are still flowing out of European equities, as a clear sign of growing investor disinterest for this much-criticised asset class, reproached for its insecurity, volatility, high level of risk, lack of visibility and complexity. Let us hope however that these same investors may one day celebrate their day of atonement, by turning long term buyers of listed European companies.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in October 17th, 2016.

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Economic misuse is like the excessive consumption of alcohol, there is the inevitable morning after, said John Kenneth Galbraith, the well-known economist who was also US ambassador to India from 1961 to 1963. Likewise, financial misuse, or rather excessive consumption of bonds, will also lead to an inevitable morning after. Investor appetite...
2016-10-14