June 09, 2017

DNCA's weekly market outlook by Igor de Maack

Management comment

Theresa May has woken up this morning having lost her absolute majority, resulting in a hung parliament. The Brexit negotiations will therefore not be plain sailing for the politicians involved or for the UK economy. The currency markets reacted immediately, with sterling depreciating slightly against the euro. In the US, it is impossible to predict the legal repercussions following the testimony by the former FBI director, perhaps involving an impeachment procedure against Donald Trump. The US economy remains on a steady annualised growth rate of 2%, accompanied by an equally bullish trend the equities market, particularly among tech stocks, led by semi-conductors. Interestingly, the market cap vs GDP ratio is diverging between the US and the eurozone. Since 2008, the ratio has increased from 80% to 156% in the US and from 40% to 70% in Europe. The willingness among investors to overprice US macroeconomic and microeconomic performance is perhaps due to the spectacular surge among internet and tech stocks. Whether this is a sign of a healthy financial situation, or an overheating economy, remains to be seen, as both arguments are valid. The liabilities side of the US GDP “balance sheet” effectively carries all of the different debt components, including mortgages, student loans and automobile and consumer credit. Aggregate US debt has risen inexorably and currently represents a total of $17 trillion, or almost 90% of nominal GDP.

Although this situation is sustainable with interest rates at their current level, the issue cannot be neglected as major crises always begin with an implosion of debt. The Chinese authorities are also keeping a close eye on their own domestic debt situation. These two champions of wealth-creation are therefore also champions in terms of creating debt. This explains why the central banks will be obliged to remain at the core of the economic landscape for several more years.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in June 9th, 2017.

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Theresa May has woken up this morning having lost her absolute majority, resulting in a hung parliament. The Brexit negotiations will therefore not be plain sailing for the politicians involved or for the UK economy. The currency markets reacted immediately, with sterling depreciating slightly against the euro. In the US, it is impossible to...
2017-06-09