December 08, 2017

Sector rotation benefits value stocks.

Management comment

Last week saw heavy sector rotation, involving profit-taking among tech stocks and resurgent investor appetite for telecoms, energy stocks and utilities.

The European banking sector was also driven higher by the announcement that the Basel 4 committee is ultimately imposing only a marginal increase in regulatory capital requirements upon Europe’s banking system, totalling €17.5 billion over an extended period. The value investment style may well end 2017 on a similar note to 2016.

Meanwhile, amid the generalised macroeconomic euphoria, the Japanese economy once again positively surprised the financial market. Recording growth for the seventh consecutive quarter, at an annualised rate of 2.5% (vs an expected 1.5%) Japan has demonstrated that its economic model, underpinned by ambitious reforms and political stability, has a beneficial impact. The Japanese economy is a judicious blend of US liberalism with German industry and exports and Chinese collective discipline, spurred-on by the slackest monetary policy in the world and an ever-depreciating currency as a result. Although the country is certainly facing some steep challenges, notably its ageing population and also productivity issues, it is nonetheless slowly lifting itself out of the doldrums.

The US markets were boosted by the prospect of tax reforms. Nothing seems to dampen investor confidence, not even the legal accusations facing one of Donald Trump’s advisors. December is traditionally a festive month in the financial markets. On average the S&P 500 index records its third-strongest monthly outperformance, behind March and April. In more than 80% of cases, the US index has gained an average of 2.5% on the month. Certain observers are starting to compare the current cycle with the 1982-2002 bull market. According to these commentators, we therefore have a dozen or so bullish years ahead of us.

Although this scenario appears illusory, many of us would eagerly subscribe to the theory and gleefully look forward to future performances while singing as a tribute to the market "Que je t'aime"!

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in December 8th, 2017.

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Last week saw heavy sector rotation, involving profit-taking among tech stocks and resurgent investor appetite for telecoms, energy stocks and utilities. The European banking sector was also driven higher by the announcement that the Basel 4 committee is ultimately imposing only a marginal increase in regulatory capital requirements upon Europe’...
2017-12-08