US influence, steepening rates

After a choppy start to the month, European markets recovered, buoyed by earnings upgrades and the indirect influence of the economic programme proposed by Donald Trump.

On 18 November European Central Bank President Mario Draghi sent out a strong signal to the markets, with the extension of the bond purchase programme.

Financial stocks surged as the yield curve steepened, returning the strongest November performance, along with materials.

Industrial stocks also rallied sharply, in a logical response to US growth outlook and as investors rotated positions towards cyclicals.

The rise in interest rates weighed on bond-proxy sectors, such as telecoms, listed property stocks, consumer staples and infrastructures.

Resurgent cyclicality and rising interest rates are the main drivers for our tactical positioning:

• We remain overweight banks, which should continue to benefit from wider spreads between short-term and longer-dated yields
• We are also overweight European cyclicals, particularly in the luxury goods sector and among discretionary consumer stocks.
• The healthcare sector, which had underperformed amid fears of Hillary Clinton being elected and which should ultimately come under less pressure from the Trump administration, remains one of our heaviest weightings.
• We are continuing to steer clear of telecoms and utilities, which are likely to remain weighed down amid steepening interest rates.