European equities remain

Supported by positive fundamentals

The European markets posted an excellent performance, more than offsetting September's drop. In fact, October turned out to be one of the best months in the last few years.

This upward movement is mainly due to expectations that the central banks will retain their accommodative policies.

It also appeared that the bleak economic outlook was not a feature of the US only, as Germany posted surprisingly weak exports and China imports crashed more than expected. Equity investors took notice and, as a result, expectations of further central banker action mounted. This drove the markets higher, as such stimuli are usually positive for risky assets. Mario Draghi delivered a very dovish speech, saying that the degree of monetary policy accommodation would be re-examined at the ECB’s December meeting.

In parallel, the Q3 results season started in Europe on a relatively weak tone. As usual, there were both disappointments and pleasant surprises. Overall, though, the results did not prove bad enough to derail the upward trend. The best performances were registered in the Euro-zone countries, with Germany ahead. On the other hand, the UK, Sweden, Denmark and Switzerland underperformed.

• We have increased the beta in all our main portfolios and will use any market opportunities to further increase our cyclical stance.
• In the Consumer Discretionary sector, we have increased our exposure to the Automobiles & components sub-sector by investing in BMW and Daimler. We have also raised Intercontinental Hotels Group.
• The risk/return ratio is still interesting in the Energy sector, and earnings publications were better than anticipated.
• We are temporarily neutral on Consumer Staples (at least for the next 3 months), taking into account the possible short-term impact of an interest-rate rise. We sold SabMiller and reduced Nestlé, Unilever and Reckitt Benckiser.
• We have also reduced the Technology sector for the same reason, i.e., that it also remains vulnerable, with little added value without M&A prospects and lacks innovative companies.
• In the Financials sector, the earnings season for the banks segment was disappointing (pressures on margins and the ongoing regulation overhang). Nonetheless, we are very stock-specific in this segment and have bought into quality banks like KBC and HSBC (for its US interest-rate exposure). We remain positive on the asset management segment (Azimut) and, while we have taken some profits on the Real Estate segment (Unibail and Deutsche Wohnen), we remain nonetheless positive on this asset class. In the Insurance segment we have raised our positions through Prudential.
• We have further reduced the Utilities sector (National Grid).
• No change in the Health Care sector, and, in Industrials, we see few upsides as we do not see any growth in this industry.
• We are strongly positive on European equities and will use any market relapse to reinforce our positions. The European markets are still supported by strong fundamentals with attractive valuations.