May 19, 2017

DNCA's weekly market outlook by Igor de Maack

Management comment

Political risk has resurged, but for once it is not the eurozone that is spooking the markets. Impeachment rumours regarding Donald Trump are becoming increasingly insistent, although for the time being it is difficult to establish the real probability of the procedure actually occurring. It should be noted that a majority vote in the House of Representatives and approval by a two-thirds majority in the Senate is required to complete an impeachment procedure in the US. The two chambers are dominated by a Republican majority.
In Brazil, President Temer also appears to be ensnared in the “Lava Jato” major clean-up operation, despite being one of the main critics of the generally corrupt system. These two issues have already triggered a minor correction amid profit-taking by investors. The Brazilian Bovespa index was trading on a 2017 PE multiple of 11x prior to the revelations and 9x when Dilma Rousseff was accused at the low point in the macroeconomic cycle. This provides an indication of the potential downslide in the Brazilian market, on a constant earnings forecast basis.

The dollar, on the other hand, accentuated its slide vs the euro, dipping below the 1.11 threshold. In a highly appropriate month for moving temporarily out of equity markets ahead of the summer recess, under the old adage of “sell in May and go away”, a spell of profit-taking could represent a welcome break ahead of a profitable second half, driven by the global economy gathering pace. At a recent seminar in Singapore, our management team was able to gauge the perceptible improvement in global momentum. A survey covering a thousand or so local investors yielded some key information. A majority of those surveyed are now convinced that the eurozone will survive beyond 2020 and that the US president will be impeached...

In Berlin, after a reasoned and cooperative speech alongside Angela Merkel, Emmanuel Macron maintained his so-far faultless performance, by announcing his eclectic collegiate government. The composition of the cabinet should provide him with a good chance of success at the legislative elections on 11 and 18 June. For the time being however, the extent of this success remains unknown. His party could secure a relative or absolute majority, or form a coalition, or enter into an enforced power-sharing situation. Chateaubriand wrote “in order to be the man of one’s country, one must be the man of one’s time”. This maxim surely seems to have escaped certain western leaders, notably the US president. Perhaps it is finally the Europeans who want to “make Europe great again”!

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 19th, 2017.

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Political risk has resurged, but for once it is not the eurozone that is spooking the markets. Impeachment rumours regarding Donald Trump are becoming increasingly insistent, although for the time being it is difficult to establish the real probability of the procedure actually occurring. It should be noted that a majority vote in the House of...
2017-05-19