November 04, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

Despite the publication of numerous quarterly earnings releases, the headlines were dominated by the US elections. This weekly newsletter will be the last one drafted under the presidency of Barack Obama. Although observers will take some time yet to make a full assessment of the results of his eight-year tenure, most will nonetheless already acknowledge seven years of continuous growth, as well as the technological progress made, the dominant position of domestic internet companies in terms of cyber-power, the decline in unemployment and the introduction of Obamacare. Like Bill Clinton previously, albeit less spectacularly, a Democrat president has demonstrated his ability to stimulate the economy and create jobs, although helped considerably by a highly accommodating monetary policy.

Although the name of the next President and the profile of the next Congress (Senate and House of Representatives) will not be known when this newsletter is published, whoever is elected will be facing a steep task. Reducing unprecedented social inequalities, decreasing student debt built up through astronomical university fees, raising wages without weighing too heavily on corporate margins, extending the economic cycle and ensuring a relative stability in the dollar, whilst operating a shift in domestic monetary policy which is now considered overly loose and distorted by financial markets. Donald Trump, viewed by investors as a populist threat, has spooked the markets, with volatility surging, as illustrated by the VIX index which has rallied from 13 to 20 in ten days.

The world will not come to an end however if he were to be elected, in the same way as it survived the Brexit referendum on 23 June. On this topic, the London High Court has ruled that the UK government must consult Parliament before triggering the Brexit procedure, although it has appealed against this decision in the Supreme Court. Divorce from the European Union is therefore not as simple as believed. In short, a series of fear factors for investors have accumulated ahead of the US election results. The Italian referendum already appears to have been lost, with the “no” camp taking the lead in recent opinion polls, and our most recent meetings with Italian companies have indicated that the result will not necessarily impact domestic policies in the short term.

As one Italian company manager highlighted with a touch of humour and self-depreciation, “whether Italy adopts an institutional system with one or two parliamentary houses, it will still be run by Italians anyway”.

So can we nonetheless resume a more serene approach in the face of all these risks? YES WE CAN, as last week saw positive inflow into European equities for the first time, after 38 consecutive weeks of net outflow.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in November 4th, 2016.

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Despite the publication of numerous quarterly earnings releases, the headlines were dominated by the US elections. This weekly newsletter will be the last one drafted under the presidency of Barack Obama. Although observers will take some time yet to make a full assessment of the results of his eight-year tenure, most will nonetheless already...
2016-11-04