February 09, 2018

Markets chill

Management comment

A chill fell over financial markets last week which seemed to reflect the cold spell in the weather which has taken hold over the past month or so.

Two sharp intra-day corrections in the US market of over 4% constitute an initial response to the surge in 10-year yields from 2 - 2.8% over the past few months. This monetary normalisation process, kicked-off by the central banks, should not be perceived solely as a risk for investors despite the VIX volatility index being driven to a level rarely seen, at 37 vs 11 at the start of the year. Return on capital has no longer corresponded to the underlying economic fundamentals for some time now.

The moderate adjustment among European equity markets in the wake of the initial panic sell-off on Wall Street was a positive surprise. Europe, and more particularly the eurozone, for once did not amplify the market trend. The performance gap compared to US equity indices, coupled with less-demanding valuations, may have served as a downside buffer. Although the macroeconomic scenario, based on synchronised global growth, has not been undermined, certain European companies may struggle to absorb the negative currency effect of a weak dollar, combined with rising commodities prices and a shortage of labour in a number of sectors such as the building industry. This year’s expected earnings growth target of around 10% remains accessible. Furthermore, net dividend payout in excess of 3% remains considerably higher than bond yields.

Adjustment phases in the interest-rate cycle, even under the control of highly-attentive central banks, are often perceived as periods of instability and turbulence. Any further downticks in the market should therefore be seized upon as opportunities to invest in European equities, which are protected by their valuation levels against the long-term rate hike scenario taking shape globally.

Today’s equity investors can be compared with experienced mountain climbers ascending a glacier and having to negotiate several deep and dangerous crevasses before hoping to reach the next summit.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in February 9th, 2018.

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A chill fell over financial markets last week which seemed to reflect the cold spell in the weather which has taken hold over the past month or so. Two sharp intra-day corrections in the US market of over 4% constitute an initial response to the surge in 10-year yields from 2 - 2.8% over the past few months. This monetary normalisation process,...
2018-02-09