Stock selection remains key

Despite renewed macro uncertainty, European equity-market indices were surprisingly stable in May. Greater volatility, however, could have been expected, given the many reasons for uncertainty (the fear of a “Grexit”, for instance). Comments from ECB officials to the effect that QE-related asset purchases would be accelerated somewhat to offset the lull of the summer months proved decisive. Similarly, the EUR, which had regained strength against the USD, lost some ground in the second fortnight of the month. This was viewed positively, as euro-zone corporations are more competitively positioned against their US peers when the EUR is low.

The Q1 earnings season came to an end in May and European corporates surprised mildly positively overall, reporting somewhat higher earnings than expected. Yet, even though this reporting period was definitely not a firework, it was solid enough not to spoil the European equity-market party that took place in the first three months of the year.

• We made few moves in our strategy last month as our pair trades were still working.
• Luxury goods names, for instance, performed well vs Automobiles (BMW, Daimler) in the Consumer Discretionary segment.
• We have reduced our positions in Swiss watchmakers (Richemont & Swatch) and reintroduced LVMH and H&M.
• We also used the current EUR/USD range to reinforce the Healthcare sector.
• In the financials segment, we have used the drop in real estate names (due to rate volatility) to reinforce our positions.
• We have maintained our negative stance on Utilities, a sector still facing regulatory issues and suffering from a lack of growth.
• Stock-picking will remain key in a more volatile and less directional market … at least until the end of the summer.