20 JUL


Equities , Topics

Europe consolidates after a solid first quarter

Executive Summary

The markets delivered an even performance in June. Only Europe corrected. Emerging countries held steady thanks to Asia.

Earnings season is coming, and some analysts may take advantage of this outlook to lower some of their forecasts. As we see it, however, second-quarter results will be satisfactory, especially in the Eurozone.

The UK is getting hit with the worst analyst revisions, compared with other regions.

Europe is expected to outperform the US in terms of growth over a 12-month period.


European Strategy

Europe consolidates after a solid first quarter

In our view, the Eurozone is still the most attractive market.

Investment flows were a little disappointing in June, but nevertheless maintained their potential.

The Eurozone held on to the top spot in our equity portfolio allocation.

We are continuing to invest in companies exposed to the strength of the European economy, or at least the continent (we are still more reserved when it comes to the UK).

We have noted two interesting phenomena in the financial sector.

The first is the prospect of interest rate hikes, albeit small ones, but enough to help banks improve their profit margins. We think this steepening of the yield curve has been insufficiently priced in by the market. Spain and Italy hold some nice potential in this respect.

The second is the likely delay in the implementation of certain regulatory frameworks, such as Basel IV, giving the sector a little breathing room.

As a result, we still have a positive view on banks, have returned to “neutral” on insurance companies, and are back to our overweight stance on the European financial sector as a whole.

We would point out that Healthcare, which we have significantly overweighted in recent months, has recorded a spectacular increase. This is a good time to take some profits, given that the upside potential has largely been tapped, and that the sector may be hindered when the rate hikes are enacted. Consequently, we have brought the Healthcare sector back to “neutral” (versus “overweight” before).

Otherwise, our European allocation is unchanged.

  • We are overweight on some European cyclicals, such as consumer services, but are neutral on Industrials.
  • We think technology is still a good medium-term investment, but are keeping a cautious stance on Energy, which is not profitable over the long term in light of its capital cost.
  • We are steering clear of telecoms and utilities for now.

US Strategy

An even performance in June, driven by Healthcare and Finance

The US is currently enjoying one of the longest uninterrupted periods of growth in the country's modern history. It took a breather in June, but the global indices were kept afloat by strong performances in Healthcare and especially Finance.

Our overweight position in Healthcare and Industrials once again paid off this month.

We were underweight on sectors such as Telecoms and Infrastructures, both of which delivered the weakest monthly performances on the other side of the Atlantic.

Casting the only shadow over the landscape was the IT sector, which began to catch its breath again.

Overall, we are holding the main lines in our tactical allocation.

  • We are leaving financials at “neutral” while keeping a close eye on the sector.
  • We are staying underweight on low-potential sectors such as telecoms and utilities.
  • Aside from the Telecom sector, which we giving a particularly wide berth, these sectors are slightly less noteworthy than in previous months, both from an overweight and underweight standpoint, with part of their journey already behind them.
  • Energy stocks still offer too little potential to be attractive buys.
  • Techs are the stars in the medium term, even if they will need a breather every now and then.

Emerging Market Strategy

Asia drives growth in the region, Brazil is gripped by political risks

Emerging markets are back on track after turning in a strong YTD performance.

Asia came out on top again thanks to its relative stability. Mexico did well, although Latin America was dragged down by Brazil's troubling political turmoil.

  • We are maintaining our underweight stance on telecoms, struggling in emerging markets as they are worldwide.
  • We are also keeping our cyclical bias (especially on techs) to continue taking advantage of the positive global climate.
  • Our allocation is unchanged: Brazil is under close watch due to political tensions; Latin America remains at “neutral.”