May 14, 2018

Market is Vulnerable, Uncertain, Complex, Ambiguous (VUCA).

Management comment

VUCA, the acronym drawn from its component words, vulnerable, uncertain, complex and ambiguous, which is applied to the analysis of human organisations, succinctly sums-up the current global situation from an economic & financial and also political point of view.

The withdrawal of the US from the Iranian nuclear agreement has tipped the world into a new era; a period in which the price of crude has breached $70 per barrel on the WTI index, with US 10-year yields becoming durably ensconced at close to 3%, and in which the dollar has wrong-footed most forex dealers by staging a rally, notably against the euro.

The US has confirmed its leadership and its weight across all domains, including the NAFTA agreement and other trade deals with the European Union, customs tariffs with China and diffused tension between the two Koreas. These decisions have a significant material impact. The Chinese mobile phone manufacturer ZTE has halted smartphone production due to a shortage of chips and other components which are now unavailable. Otherwise, following the US withdrawal from the nuclear agreement, the Iranian rial exchange rate vs the dollar reached almost 50,000 in grey-market trading, which is 5 times higher than when sanctions were introduced in 2012.

However, the markets did not react negatively, despite the inevitable incertitude triggered by the decision, as they had been adequately prepared by Donald Trump’s rhetoric which was already clearly set out during his campaign speeches. Meanwhile, the European integration process has stalled. Italy is still seeking to form a government, perhaps involving parties advocating a philosophy which is far removed from the European project, or even diametrically opposed. France is undertaking reforms amid social unrest, which is under control for the time being despite costly major strikes in the transport sector at Air France-KLM and within the SNCF rail network.

Germany appears so far to be doggedly sticking to its rigorist budgetary principles. The general tone is therefore ambiguous, given that Europe, which is experiencing growth in its economy while a number of positive signals are also discernible in terms of upward revision momentum in corporate earnings, could accelerate its transformation.

The past few weeks have seen hefty sector rotation. Sectors which have been broadly neglected over the past few years, such as utilities and telecoms, have rallied, whereas others including automotive stocks and banks have been sold-off. Oil has staged a major comeback among investor allocations as the current trend in the price of crude has breathed new life into major exploration projects and fed into the cash machine that the best-managed majors in terms of costs, such as Total, have developed over the lean years.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 11th, 2018.

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VUCA, the acronym drawn from its component words, vulnerable, uncertain, complex and ambiguous, which is applied to the analysis of human organisations, succinctly sums-up the current global situation from an economic & financial and also political point of view. The withdrawal of the US from the Iranian nuclear agreement has tipped the...
2018-05-14