October 06, 2017

The economy flies over the political turbulence.

Management comment

Certain European leaders and decision-makers with inflated egos appear to be more interested in securing power than democratically respecting the law and the rules of economic pragmatism.

Playing the dramatic “oppressed” nation card which is currently blessed by good fortune (3.5% quarterly Spanish GDP growth), the incumbent Catalonian leaders have voluntarily backed themselves into a corner in their headlong rush to embrace insularity in a globalised and digitalised world. Catalonia represents 2% of the eurozone economy, with public debt representing 100% of GDP. As Europe has reiterated, independence from Spain would lead to an automatic exclusion from the Union and the eurozone. The question therefore arises whether the real goal of independence is simply for certain protagonists to secure absolute power and obtain the satisfaction of political independence, but still remaining very heavily economically dependent on Spain, its main commercial partner, and also on Europe. As was the case with Greece and the Brexit, this episode may prove to be a further demonstration of the strength of the European model and its institutions. For the time being however, the markets understandably view the situation as a source of volatility, given that the legal confusion and the weakness of the majority supporting Mariano Rajoy could lead to early elections in Spain.

In the US, forward guidance from the Fed has clearly prepared investors for a rate hike in December.  For 2018 however, the markets are still uncertain whether to expect two or three further hikes, particularly as next year Janet Yellen’s tenure may or may not be renewed and the new US tax programme will probably be implemented. Budgetary funding for the projected fiscal reform, covering USD 2,000 billion over ten years, still remains uncertain. It is clear however that the US economy is highly dynamic, driven by the weaker dollar. This is also the case in Europe and even in France, where the INSEE has revised its 2017 GDP forecasts upwards to +1.8% due to a recovery in corporate and household investment. US equity indices have hit new all-time highs, driving the performance and valuation gap between US and European markets to the widest levels ever. Accelerating economic fundamentals in the eurozone mean that any weakness in the markets should therefore be seen as an investment opportunity. 

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in October 6th, 2017.

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Certain European leaders and decision-makers with inflated egos appear to be more interested in securing power than democratically respecting the law and the rules of economic pragmatism. Playing the dramatic “oppressed” nation card which is currently blessed by good fortune (3.5% quarterly Spanish GDP growth), the incumbent Catalonian leaders...
2017-10-06