August 11, 2017

The ambient cold war atmosphere has chilled investors and frozen investment decisions.

Management comment

The ambient cold war atmosphere has chilled investors and frozen investment decisions.

Although the war of words between the US and North Korea should not be taken lightly, it is even harder to anticipate political events and decisions than to predict the year-end level of equity indices. A closer look reveals that the years covering the real, or rather the first, cold war (1947-1989) were a plentiful period for the global economy and equity markets. Of course the world’s economies ebbed and flowed and suffered crises during this period, although investors were became used to the presence of a recalcitrant and threatening soviet bloc, in the same way as they have become accommodated to the baroque functioning of the People’s Republic of China. Markets are therefore undergoing a correction primarily in response to the current threats. The financial markets are nonetheless gripped by M&A fever, with Vantiv launching a bid for Worldpay in the payments solutions sector, Atlantia bidding for Abertis in the infrastructures segment and talk of a tie-up between Sprint and Charters Communication in media and telecoms industries.

The summer has so far been relatively turbulent, as has often been the case in recent years, and investors are having to get used to a new somewhat unexpected situation, with the dollar plummeting against the euro (1.18). Although Donald Trump has not yet altered the course of the US economy, his repeated failings have paradoxically triggered a loosening of monetary conditions for major US companies. The weaker dollar boosts exporting companies and also has a positive impact on P&L accounts, notably through the currency effect on profits generated in the eurozone.

Lastly, with 10-year interest rates remaining at very low levels (2.2%) real long term financing costs in the US are still at historic lows. Behind the political rhetoric, lies the reality of the economy and markets. Let us try to remain focused on these hard facts over the next few weeks.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in August 11th 2017.

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The ambient cold war atmosphere has chilled investors and frozen investment decisions. Although the war of words between the US and North Korea should not be taken lightly, it is even harder to anticipate political events and decisions than to predict the year-end level of equity indices. A closer look reveals that the years covering the real,...
2017-08-11