March 05, 2018

Europe lag behind Wall Street despite good economic indicators

Management comment

The world of capitalism has once again been struck by the paradoxical Donald Trump who has announced plans to implement customs tariffs on imports of steel (25%) and aluminium (10%) to the US.

These protectionist measures, which were already largely proposed during the presidential campaign, have rattled the equity markets as we head into March, particularly in Europe. Although the indices resisted the flash crash in the US in February, Europe is now underperforming the US significantly in local currency terms. The CAC 40 is even outperforming the DAX 30. In short, Europe and the eurozone will have to start from scratch once again, although the political horizon is now clearing, with the SPD voting in favour of a coalition agreement in Germany and the Italian legislative election results coming-in broadly in line with expectations, albeit highly inconclusive. Macroeconomic indicators remain highly bullish, particularly in terms of the volume component which represents the underlying economic situation. On the other hand, there is still an absence of any real price inflation which remains far below the 2% target at 1.3%. The omniscience of ultra-globalised capitalism has now been brought into question in several countries in the wake of the US.

Emerging markets are also following suit, with India applying heavy constraints on importers for the past few months. China, which has always managed to defend its domestic economic interests, is changing its institutional model and granting full powers to Xi Jinping for an indefinite period. This can hardly be considered as a lukewarm response to the battering-ram approach adopted by the US, its commercial arch-enemy. Japan is proving to be the only exception by progressively opening-up its borders ahead of the 2020 Olympic Games, particularly to tourists, by deregulating its visa policy and targeting 40 million visitors compared to 28 million today. The country appears powerless however, against the major nations which have contributed to its remarkable export capacity over many years. 2018 will not be an easy year for fund managers due to the resurgence of many risk factors such as volatility, forex risk and interest-rate risk.

A great deal of agility is required, like the frail boat in the print entitled The Great Wave off Kanagawa by the Japanese master painter Hokusai.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in March 5th, 2018.

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The world of capitalism has once again been struck by the paradoxical Donald Trump who has announced plans to implement customs tariffs on imports of steel (25%) and aluminium (10%) to the US. These protectionist measures, which were already largely proposed during the presidential campaign, have rattled the equity markets as we head into March,...
2018-03-05