November 25, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

During three out of the past four weeks, inflow into European equities has reached almost a billion euros weekly, as investors have reallocated funds by switching out of bonds and emerging markets. After their recent rally, long-term rates stabilised in most countries apart from Italy. Investors will of course remain focused on the Italian referendum result.

As far as the markets and the opinion polls are concerned, the death knell has already sounded for future domestic reforms. Italian assets across the board are already trading at a discount in the markets. Year to date, the MIB 30 index has lost around 23% and Italian 10-year spreads over German yields of the same maturity have widened to almost 190 basis points. However, since the beginning of the year, electors have wrong-footed the opinion pollsters and investors. Will Italy also deliver a surprise? This is a hard call to make, particularly as voters now appear to systematically reject any positive and well thought-out political projects. This particular vote concerns a simplification of the electoral system. Italy’s future in Europe and the eurozone will require reforms at some point. Persistent instability among Italian governments is hardly a step into unknown territory. On the contrary, it is par for the course. Although investor fears are understandable, anticipating a political scenario and its consequences over the next two to four years is an arbitrary and inefficient exercise in 2016.

For example, it seemed impossible for a member state to wish to leave the EU, but the pro-Brexit vote proved that such a move could be envisaged without being fully aware of the fact beforehand. It seemed impossible to exit the eurozone, yet the Greeks attempted to do so with their own referendum, but ultimately implemented all of the reforms required by their creditors, and retained their membership. It seemed impossible for Donald Trump to be elected, but he finally was, and is now proposing an economic programme which could boost the US economy and benefit its consumers. On this topic, initial pointers from Black Friday, against the backdrop of a strong dollar, will be eagerly awaited.

Although the forthcoming French and German elections are just as important, investors will be wise to avoid giving into panic. Our democracies are perhaps not as weak as would appear in the press or on our Bloomberg screens. The great ancient Greek democratic philosopher Aristotle said “when a man thinks of his past, he lowers his eyes towards the ground and when he dreams of his future, he looks to the sky”.

It is now time for the electors, investors and citizens of Europe to think of the present and focus on the point that separates the earth from the sky...i.e. the horizon.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in November 25th, 2016.

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During three out of the past four weeks, inflow into European equities has reached almost a billion euros weekly, as investors have reallocated funds by switching out of bonds and emerging markets. After their recent rally, long-term rates stabilised in most countries apart from Italy. Investors will of course remain focused on the Italian...
2016-11-25