The market rose further in July, reaching a historical high. Investors have been digesting the results of the June UK referendum. While the outcome of the referendum came as a shock, after an initial panic-selling move, investors have been buying back equities on the understanding that central banks and governments across the world would take the necessary actions to neutralise the negative impact of the “Brexit”.

Economic data during the first weeks of July were also supportive. In particular, the June non-farm payrolls was solid.

Economic data during the first weeks of July were also supportive. In particular, the June non-farm payrolls was solid.

Published later in the month, June retail sales also pointed to solid domestic demand. The strong spending numbers (proof of solid consumer fundamentals) confirm anticipations of a rebound in consumer spending.
Published towards the end of the month, however, the first estimates of Q2 real GDP surprised well to the downside, growing at an annualized rate of only 1.2% q-o-q against 2.5% expected.

While valuations of US equities might appear somewhat stretched, results were rather supportive, with tech giants such as Apple, Facebook, Alphabet (Google) and Amazon releasing solid earnings. In He alth Care, companies delivered decent earnings. Some Industrials names are doing well, e.g., Cummings, which posted decent results and has good management cost controls in place. All in all, the Q2 results published so far have been better than expected.

  • Compared to the end of June, we have made only minor changes in our sector allocation.
  • We have reduced positions in Consumer Staples and Energy and reinvested the proceeds mainly in Health Care and IT.
  • We raised or initiated positions in Amgen, Eli Lilly, Microsoft, Stanley Black&Decker,... We reduced positions in Delphi, Colgate, Schlumberger, Pepsi, Whitewave (after the acquisition by Danone), and Noble Energy…
  • We remain positive on Consumer Discretionary, Consumer Staples, Healthcare, Industrials and IT.
  • Our largest active positions are: Pepsico, JP Morgan, Stanley Black & Decker Time Warner and Colgate.

The IMF expected world economic growth forecast of around 3.1% in 2016 and 3.4% in 2017 seems very challenging in the current environment. After the Brexit vote, we became more cautious and the coming US elections are making us even more so. That's why we prefer to be more on the defensive side, in sector allocation as well as in individual stock selection.
The low interest rate environment, reasonably priced equity markets, high free cash generation, increasing dividends and stock buy-backs, as well as M&A activity, should still be supportive of a cautiously optimistic scenario for the equity markets.

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