March 29, 2018

Risk aversion dominates

Management comment

Investors have entered into another risk aversion phase. The valuation bubble among US tech stocks beginning to burst combined with rising anti-globalisation sentiment and more sluggish macroeconomic indicators have rattled global equity markets and of course bond markets.

Long-term rates appear to denote an ambient sense of pessimism regarding the global growth trend. Or else they are just providing the usual safe-haven during a turbulent market phase, as investors apply the flight-to-quality philosophy. In short, the scenario anticipated earlier in the year involving further steepening among long-term rates, coupled with higher inflation and faster growth, has not materialised for the time being. Although earnings forecasts have resisted so far, we are only one quarter into 2018. Forex volatility is not good news either. The dollar is stagnating at around 1.23-1.24, impervious to future expected rate hikes by the Fed.

Consensus is forecasting a weaker dollar. It should be noted that from 2004 - 2006, when the Fed raised its base rates 17 times, the dollar weakened. Trends can therefore be particularly counter-intuitive and official comments regarding global trade relations, notably between China and the US, are not putting investors’ minds at ease.

Furthermore, the continued rise in the price of oil is also negative for economic growth among importing countries. It may be advisable to focus on domestic themes in the eurozone for now. H1 is not favourable for the time being.

Equity markets are hanging on the words of the leaders regarding a trade war. However, geostrategic relations may nonetheless provide some serenity with the forthcoming meeting between the US and North Korea under the auspices of China. Although the Easter break will mark a pause during this turbulent start to the year, the topics preoccupying investors will nonetheless prevail for some time.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in March 29th, 2018.

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Investors have entered into another risk aversion phase. The valuation bubble among US tech stocks beginning to burst combined with rising anti-globalisation sentiment and more sluggish macroeconomic indicators have rattled global equity markets and of course bond markets. Long-term rates appear to denote an ambient sense of pessimism regarding...
2018-03-29