December 09, 2016

DNCA's weekly market outlook by Igor de Maack

Management comment

It is impossible not to mention once again President-elect Trump, recently named 'Person of the Year' by Time magazine. With Donald, investors (especially equity investors) are, like Alice, in wonderland. US indices are hitting new all-time highs, while the European markets began their year-end rally in the wake of the resignation of the tempestuous Matteo Renzi, who overestimated his popularity among his citizens and linked his future with the result of a referendum on a somewhat technical issue.

Without any imminent elections looming, investors seem to have rediscovered an interest in equities and now consider it appropriate to include in their portfolios a number of companies which they vilified in the past, such as oil stocks and banks. Asset-class and sector rotation has continued under the magic spell of Christmas. Given their weight in the indices, financials and commodities have raised a tough challenge for non-benchmarked investment managers who have been steering clear of these value themes for too long.

On the economic front, for the time being, the domestic proposals included within the Trump programme have convinced investors that the US cycle will be extended. It remains to be proved, however, that boosting the global economy through fiscal stimulus measures constitutes a viable and appropriate solution and that inflation will also benefit employees.

In the eurozone, the ECB announced the extension of its quantitative-easing programme, albeit with a reduction in monthly purchases from €80 billion to €60 billion, while applying a more flexible approach to its purchasing, particularly in terms of yield and maturity criteria. This move resembles a thinly veiled form of tapering, which failed to dupe the bond markets, as European sovereign rates steepened on the day of the announcement. Monetary divergence between the US and the eurozone may therefore not last for long. Allowing US yields to steepen too much, without adjusting its monetary policy accordingly, would direct the majority of global flows towards the dollar zone and negatively affect Europe. There is still time to overweight portfolios in banking stocks and value themes. Since 2008, it has been almost impossible to convince European investors to consider European equities and these types of sectors. These spurned investment themes could finally be finding (some) favour with investors.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in December 9th, 2016.

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It is impossible not to mention once again President-elect Trump, recently named 'Person of the Year' by Time magazine. With Donald, investors (especially equity investors) are, like Alice, in wonderland. US indices are hitting new all-time highs, while the European markets began their year-end rally in the wake of the resignation of the...
2016-12-09