November 10, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

The nation that invented Mickey Mouse has finally elected Donald Trump to the general surprise of worldwide financial, political and media elites, except perhaps in Russia. Although the first of the major political deadlines has now passed, it has opened a period of uncertainty. This result was expected to rattle US and European equity markets for a while, accompanied by increased volatility. For the time being, however, counter-intuitively, it has had the opposite effect on the elites in question. Stock markets and US long-term rates have rallied, alongside the dollar. Following the inanities of the campaign, economic and monetary issues, coupled with questions regarding measures intended to rekindle growth, will soon resume centre stage in the US and elsewhere.
For the time being, the economic programme announced by Trump is inflationary and protectionist, with plans to increase customs duties, renegotiate trade agreements, save jobs in the US and relaunch infrastructure programmes.  Promises focus chiefly on generalised tax cuts which nonetheless need to be financed, unlike the current situation, either by increasing the deficit or by reducing public expenditure or subsidies. The economic programme aims to revitalise unequal growth, which is losing momentum and has been artificially inflated by a monetary policy which has been distorted by financial markets. One of the first issues to be tackled by the Trump administration will be to restore a degree of financial orthodoxy and clarity in Fed policy.

Regarding the new geostrategic political programme, we must hope that the new president will not apply all of the absurd ideas which were voiced prior to the vote. The victory speech already adopted a more conciliatory tone with regard to other nations, which was far less hawkish then during the campaign. With the election of the president and a majority in both chambers of Congress, the Republicans now hold full executive power. Will they really be able to MAKE AMERICA GREAT (and RICH?) AGAIN? This is the real question, although when analysed more closely, the new US economic and monetary programme is far from being 1/ stupid or 2/ globally harmful.

For investors hoping to capitalise on current or future volatility, reinvesting into European equities, particularly in cheaper value sectors, such as pharmacy, commodities or banks, should prove profitable over the long term. We still consider long-dated bonds overvalued and particularly risky if inflationary pressures arise in combination with a widening budget deficit during Trump’s tenure.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in November 10th, 2016.

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The nation that invented Mickey Mouse has finally elected Donald Trump to the general surprise of worldwide financial, political and media elites, except perhaps in Russia. Although the first of the major political deadlines has now passed, it has opened a period of uncertainty. This result was expected to rattle US and European equity markets...
2016-11-10