Despite a negative month

European equities are still supported by positive fundamentals

After a difficult August, the European equity markets took another step back in September. Nonetheless, the first fortnight of the month looked like a relatively quiet period. The worries about the Chinese economy slowdown that had triggered the summer fall had, however, not disappeared. In addition, the markets started anticipating a rate rise by the US Fed on the occasion of its mid-September meeting.

Things turned much sourer in the second fortnight. Firstly, the markets were disappointed by the inaction of the Fed, then the Volkswagen story broke, taking the European equity markets by surprise. The VW share price fell heavily as a result, as investors started considering that large penalties and associated costs would be imposed upon the company. This took other car manufacturers’ share prices down with it, as well as other sectors and, by extension, European equities as a whole. As if that were not enough, new fears erupted in late September, related to credit risk. Glencore was the most significant example of these new fears, as the “perfect storm” combination of its large debt pile and exposure to commodities triggered heavy selling by nervous investors.

Economic data released towards the end of the month turned out slightly better than expected. September was clearly a down month for the European equity markets.

• We have raised our positions in Energy (Total, Shell), Mining and Chemicals (BASF).
• Valuations are attractive in Energy, with excellent costs and capex management. We seem to have reach an equilibrium in supply/demand in the segment. The sector remains largely under-owned.
• We have taken some profits on the Health Care Equipment, HPC (we remain OW on Reckitt) and Real Estate segments.
• There is not enough upside for the moment to become more positive on Financials. But we nonetheless remain positive on Real Estate. We still see no upside in Telecoms.
• Going forward, although we are looking for bottoming-out stocks to increase our positions in Automobiles, we will remain prudent, as we have to see the positions the control authorities will take on the sector following the VW scandal.
• The beta is increasing in all our strategies (above 1).
• We are strongly positive on European equities and we will use any market relapse to reinforce our positions. The European markets are still supported by strong fundamentals with attractive valuations.