July 28, 2017

America is back (great ?) again.

Management comment

Whether America is great again may remain a subject for debate, but it has certainly been making news. Recently, the world’s greatest economic power has been firing on all cylinders: the S&P 500 is at a record high; blue-chip companies like McDonalds and Caterpillar have posted excellent results; the government is pursuing new sanctions against Russia, Venezuelan officials and Chinese companies operating in North Korea; and the Navy fired warning shots at an Iranian vessel in the Persian Gulf. Despite Trump’s isolationist campaign rhetoric, governmental checks and balances on the executive have ensured that the US continues to dominate global economic and political affairs. There is one blip on the radar: the dollar’s relative weakness against the euro (1.17:1) has left those who were betting on a 1:1 exchange rate in the lurch. Still, even this has its upside—a weak dollar is a boon for US exporters.

Europe is also faring relatively well. Five years after Mario Draghi’s famed vow to do “whatever it takes” to save the euro, Greece has made its triumphant return to the bond market. It issued a new 5-year bond, which could be purchased with cash or exchanged for older bonds set to mature in 2019. The Eurozone has seen a return to both economic growth and political stability. While earnings season has thus far fallen somewhat short of expectations, the markets continue to approve of this buoyant climate, with volatility at historic lows and interest rates that remain extremely modest. If current trends continue—mixed earnings results, a declining dollar-to-euro exchange rate and rising interest rates—the markets may be in for some corrections before year’s end.

China could also have an impact in this regard, as its government starts to scrutinise debt levels and foreign acquisition efforts at major corporations like HNA, Wanda, Anbang and Fosun. A return to volatility is therefore not out of the question. Investors would do well to hedge their portfolios against this eventuality.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 28th, 2017.

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Whether America is great again may remain a subject for debate, but it has certainly been making news. Recently, the world’s greatest economic power has been firing on all cylinders: the S&P 500 is at a record high; blue-chip companies like McDonalds and Caterpillar have posted excellent results; the government is pursuing new sanctions...
2017-07-28