DNCA: Focus still on eurozone
By Jean-Charles Mériaux, Chief Investment Officer, DNCA
DNCA outlines its views on the macroeconomic outlook, the financial markets and its investment strategy for 2016.
High hopes for the eurozone in 2016
2016 looks hopeful, from a macroeconomic standpoint, the Eurozone is the only major region that did not display disappointments in 2015.
It currently sits in the middle with the US economy on one side, where industry is showing signs of a slowdown, and the emerging markets on the other, which are either undergoing a structural crisis, particularly commodity producers such as Russia and Brazil, or else undergoing a complete transformation such as China.
The external context is fairly complex and against the backdrop of a worldwide slowdown, it is reasonable to assume that the eurozone will be the only area to pull off any positive surprises this year.
A range of macroeconomic data supports our views
A number of macroeconomic statistics back up our view. Firstly, the ECB’s reflationary policy has been a success. Interest rates are converging for both states and corporates, lending has resumed in most countries and the weakening euro is set to continue its positive impact.
Secondly, falling commodities prices give the eurozone a great stimulus: the area always lags behind the US economic cycle but no longer seems to pose a threat to world growth, unlike at the start of 2015, and especially over the period 2010-2012.
In addition, political uncertainty within the eurozone is no longer a source of concern for the financial markets, although this may perhaps only be for a limited length of time.
Another important factor is capital flows witnessed in 2015: massive outflows from bond funds, withdrawals from emerging funds (mostly Chinese) and from US equity funds, as well as inflows into European and Japanese funds all look set to continue. This trend can be attributed to diverging economic cycles across the various countries, along with the mismatch in monetary cycles.
In the USA, the rate hike cycle could pick up speed, running against market expectations. This may dent lending and have a knock-on effect on the emerging markets.
For the first time in around 10 years, we are poised to see economic and monetary desynchronization. The slowdown in international trade, which is now growing at a slower pace than world GDP, marks the end of a period of globalization of industry worldwide.
We are currently witnessing a slowdown across certain markets that display restrictive monetary policy or that are set to embark on restrictive monetary policy, such as the USA and other countries that have pegged their currency to the dollar. Conversely, Europe is back on track for growth and is set to endeavor to make up the lag it has built up since the crisis in 2008.