The stock markets in June were dominated by the British referendum on the EU. The markets were surprised by the 'Leave' victory, as most investors thought the Bremain camp would have prevailed. While Japan and Europe dropped significantly, the US market, unsurprisingly considered as a safe haven, closed almost unchanged.

The defensive sectors, suchs as consumer staples, telecom, utilities and healthcare outperformed. More cyclical sectors, such as materials and consumer discretionary, and financials underperformed in the current market environment.

In this context, we have decided to maintain our relative defensive bias, both in sector allocation and individual stock selection.

  • We have maintained a neutral on consumer discretionary. We recognise the positive earnings surprise of Nike on the positive side. Nevertheless, we are less confident on the automobile sector. We have some positions in Media, but those are stock specific (Fox, Time Warner).
  • We have maintained a neutral on financials, that are under pressure in this low yield environment.
  • We have maintained our neutral positioning in industrials. We hold no transportation names.
  • We have further increased our exposure to consumer staples, following the Brexit vote. The sector has a stable organic growth, which is favourable in this market environment.
  • Despite the recent underperformance following the Brexit vote (high Europe exposure of around 30 %), we have maintained a positive view on technology. Earnings and high organic growth should support the sector’s relative performance. Upcoming Q2 earnings will be monitored closely, as they will impact the IT sector more than other sectors.

The IMF expected world economic growth forecast of around 3.2% in 2016 and 3.5% in 2017 seems very challenging in the current environment, while the upcoming US elections make us even more cautious. 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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