Strong rebound of US equities last month

We started the month with much weaker-than-expected employment data in the US, which invited economists to downscale their expectations of a rate hike this year. The September FOMC minutes suggested that “above-trend growth” was a necessary condition for ‘lift-off’. The weak non-farm payroll data proved extremely favourable to the equity markets. Later in the month, the rally was further fed by supportive comments from the ECB and the PBOC. The October FOMC meeting statement specifically addressed the conditions that would make it appropriate for the Fed to raise the target range at its next meeting in December. Less clear is whether US data will be strong enough to let the FOMC initiate lift-off before year-end.

• The US equity market remains difficult. B-to-C remains healthy but B-to-B is lagging. Although the earnings season was poor for Industrials, the defensive sectors scored better. We still do not see any Capex increase.
• The Consumer Discretionary sector could suffer from rising rates. Automobile purchases are on their highest levels in months.
• Depending on the timing of the Fed we could change our view on the Financials sector.
• We remain positive on the Health Care sector, but it could face headwinds until the US Presidential election next year over the real cost of medications.
• The IT sector was among the best-performing sectors in October. Software stocks performed better on average than Semiconductor and Hardware stocks. This was mainly due to the positive reactions on results from Software bellwethers Microsoft and Google. M&A activity was another supportive factor (Dell-EMC, Western Digital-Sandisk, LAM Research-KLA Tencor, ...).
• In Utilities and Telecommunications there is no good news in the offing, no strong guidance from US majors, little added value and some pricing pressure.
• In Consumer Staples we see some pricing power coming back as US consumption remains healthy.
• We have reinforced our positions in IT, using Consumer Discretionary as a source of cash. We raised or initiated positions in, among others, Linear Technology, Facebook and Google while reducing positions in Polaris Industries, Brown-Forman, Carnival Corp and Starwood.
• Currently, our preferred sectors remain Consumer Staples, Consumer Discretionary, Healthcare and IT.
• Our largest US active positions are: Occidental Petroleum, Pepsico, Citigroup, Johnson & Johnson and Ingersoll-Rand
• The IMF expected world economic growth forecast of around 3.1% in 2015 and 3.6% in 2016 was revised downwards recently, but probably remains a little too high. However, it is still way too early to favour a global recession scenario (US and European macro data are still strong).
• We continue to believe that our portfolios should be cyclically oriented. Combined with low interest rates, reasonably priced equity markets, high free cash generation, increasing dividends, stock buy-backs and a lot of M&A activity, the environment for rising equity markets is still in place.