December 22, 2017

2018 may be a slightly less festive and more volatile year...

Management comment

In 2017, investors will have recorded positives performances across almost all asset classes including US, emerging and European equities, sovereign bonds, credit markets, high yield, real estate, all types of commodities and crypto-currencies. There are some notable exceptions however, including Russian equities, rubber and surely some other asset classes with minor allocations in terms of the global capital currently in circulation.

Macroeconomic euphoria has been underpinned by monetary euphoria, fed by global liquidity expanding faster than nominal growth. What surprises can investors therefore hope to find under the Christmas tree this year? Firstly, the largest and best-wrapped present would be an extension of the upbeat macroeconomic trend, accompanied by stronger corporate earnings momentum, particularly in Europe. Another wonderful gift would be a progressive controlled steepening of long-term rates with a slight uptick in inflation, which would not weigh on growth but would restore solvency among life insurance savings schemes and retirement pension annuities.

Donald Trump has already presented his year-end tax gift after multiple setbacks and discussions. His first year of tenure is drawing to a close on the slightly disconcerting observation that since November 2016, global financial markets have progressed unfalteringly, with US indices hitting seventy new all-time highs in a row. Even more surprisingly, although the geopolitical context has outwardly deteriorated due to the heedless communication style adopted by the US administration, the situation remains fundamentally unchanged. The backdrop for the start of 2018 is coloured by the same constraints and balance of powers as before, characterised by the China-Korea-Japan triangle, the more or less head-on conflict in the Middle east between the two fraternal enemies Saudi Arabia and Iran, amid more complex relations with Russia, the Merkel-Macron romantic idyll and the risk of European political fragmentation in Catalonia and Italy. It could almost be tempting to cite the old adage saying if it works, then don’t change it!

Investors sense however that 2018 may be a slightly less festive and more volatile year and that a number of bubbles may burst. Within the internet economy, the first signs of growing state awareness are beginning to become discernible, with governments launching major projects aiming to take back control of these new systems which threaten their powers and exploit individual privacies. Fresh measures introduced include new tax regulations, the application of the European General Data Protection Regulation directive and the introduction of stricter regulations for socially disruptive business models such as Uber and Airbnb. Before we share our view for the year which is about to begin with you, the whole DNCA investment management team would like to wish you a happy festive period.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in December 22nd, 2017.

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In 2017, investors will have recorded positives performances across almost all asset classes including US, emerging and European equities, sovereign bonds, credit markets, high yield, real estate, all types of commodities and crypto-currencies. There are some notable exceptions however, including Russian equities, rubber and surely some other...
2017-12-22