What Happened in November
European equities tended to lose ground over November as Donald Trump’s surprise victory in the US presidential election raised fresh worries over European political and economic stability. As well as concerns over the president-elect’s commitment to European security, markets fretted about a possible decline in global trade and a general rise in protectionism. With the Trump win and the Brexit vote highlighting the ongoing rise in populism, there was increasing speculation that a vote against constitutional reform in Italy’s December referendum could lead to the nation’s departure from the euro zone; markets again focused on the fragility of Italian banks. Eurozone economic data continued to suggest a sluggish pace of growth, with official data showing growth expanded by 0.3% over the Q3, unchanged from the prior period. Germany’s economy slowed by more than expected in the third quarter as weaker exports saw the economy grow by just 0.2%, half the rate registered in the second quarter. Meanwhile, the eurozone composite purchasing managers' index (PMI) gauge of service and manufacturing activity for October disappointed market expectations. Eurozone inflation reached its highest level since early 2014, an annual rate of 0.6% in November versus 0.5% in October, largely due to firmer energy prices. While the European Central Bank (ECB) left interest rates unchanged, speculation mounted that it would announce an extension to its current bond-buying programme at its December policy meeting. ECB President Draghi said the central bank needed to maintain its monetary support measures to achieve its 2% eurozone inflation target, versus the latest 0.6% rate.
In this market environment, the Fund posted a loss and underperformed its market segment. This was mainly due to stock selection with stocks of the materials sector underperfoming, while the sector allocation had a positive impact due to the underweight to utilities.
Outlook and Strategy
With the election of Donald Trump as 45th President of the United States, de-globalisation will probably pick up speed, as will deficit spending. In Europe, the UK government is aiming to present a Brexit timetable by the end of March 2017. In addition, several presidential and parliamentary elections will take place next year. This will create a sufficient number of opportunities for geo-political discussions and, in turn, volatility. Monetary policy will remain one of the key issues. Whatever the Federal Reserve does (and this topic is currently the subject of numerous heated discussions), its overall stance will remain expansionary, in line with that of central banks around the world. The ECB will not stage an exit from quantitative easing any time soon, either. Basis effects from energy prices will probably push low consumer price inflation up towards the higher core rate. In addition, public-sector spending programmes are gaining support and the de-globalisation trend and higher tariffs will boost inflation.