EU referendum in the UK weighing on the European equity markets

Over the month, European markets posted a U-shape profile. Risk-off mode was the pattern, continuing the downward trend triggered on the last trading day in April. A weak US consumption figure, a rising EUR vs. the USD and renewed geopolitical issues such as the Greek debt negotiations and the “Brexit” risk were sufficient to fuel bearish views across the equity markets.

Data published in the first few days of the month poured more cold water on hopes of an improving global economy. But the last part of the month saw European equity markets becoming more constructive. The reasons for this positive spirit were rooted across several dimensions. On the economic front, the US FOMC minutes, sent out strong signals that the Fed expected to raise its short-term rates over the summer. On the geopolitical front, negotiations around the Greek debt situation were successfully concluded in the final days of the month. Finally, it is important to note that oil prices gradually rose over the month, confirming the upward trend that had started in February.

• We made few moves in May.
• We raised our exposure to Shire in Health Care, while also raising our retail banking allocation through KBC following excellent figures.
• We have raised our exposure to Chemicals as we see a lot of upside (BASF, Solvay) and investors are underweighting the sector.
• We added two new names to the portfolio: Swiss private banking group Julius Baer and Italian luxury brand internet retailer Yoox-Net-a-porter. Julius Baer has de-rated over the past year and now seems ready to enhance its growth outlook, mainly following recent acquisitions and the recruitment of more relationship managers. As for Yoox-Net-a-porter, the merger last year between the two entities has reinforced the competitive advantage as the business model is now better diversified and quite unique.
• Following mitigated results and a challenging outlook, we have slightly reduced our exposure to Richemont.
• Uncertainties regarding the EU referendum in the UK, as well as the upcoming Spanish general elections and the next FOMC meeting, are still weighing on the markets. Once these uncertainties have been alleviated, we should witness a market rebound.
• The current environment of still very low correlations has reinforced our aim to reduce the number of lines in our portfolio. As disparity is huge within each sector, stock-picking remains key.