EUROPE STRATEGY

Once again, European equity markets faced a very turbulent month in February with two opposite movements over the course of the month: a sharp fall in the first fortnight, followed by a rally.

The first fortnight of February continued the downward trend of January: a bear market, fuelled by the same fears, including a rapidly slowing Chinese economy, a sharp fall in the oil price and a slowing US economy. The corporate earnings season was also far from stellar. Renewed credit risk and balance-sheet-strength fears continued to plague the European banking sector, in particular the Italian banks, as well as other, often commodity-related, stocks.

Then, from mid-February onwards, the mood gradually swung to a more constructive mode. Negotiations between the UK and the European Union led to an agreement, paving the way for David Cameron to campaign against a “Brexit” in the upcoming UK referendum. More importantly, the continued fall in medium-term inflation expectations in Europe led investors to believe the ECB would announce further easing measures at its March meeting. As was the case on previous occasions, such hopes on monetary policy triggered a rally in risky assets, European equities in particular.

  • As stock-picking will be key in the coming months, and with a fall in correlations, we took the opportunity to concentrate our portfolio and reduce the number of stocks.
  • We have reinforced the global macro exposure, mainly on Energy and Mining names.
  • We have consolidated our Luxury Goods exposure (Richemont, LVMH). Contrary to common thinking, growth in the Luxury sector is not driven mainly by China and Asia. For instance, 26% of LVMH’s revenue comes from the United States.
  • We also added to our positions in Financials ahead of the ECB meeting in March.
  • We took some profit on growth names, which have become expensive. We have reduced our positions in Consumer Staples and Food & Beverages.
  • Investors have reduced their underweighting of the Energy sector but still remain opposed to investing in Materials and Banks, which vindicates our strategy.
  • Low volatility and growth strategies will suffer in the near term as value names are rerated.
  • Stock selection will be more and more important for selecting companies to deliver profit guidance’s in the next 3 months.

Value names should rerate in the short term

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