Geopolitical tensions in Korea are a matter of concern, but, more positively, our global positioning remains unchanged. We have, of course, to err on the side of caution, downgraded Korea to ‘neutral’ in our Emerging Market allocation.
The most positive earnings revisions occurred in Japan, where we were constructive.
EPS growth revisions are again in favour of the EMU (against the US)
Economic data remain supportive for Europe, and valuations are still attractive. Technical analysis indicators are pro-cyclical.
We have liquidated some positions to raise cash, very temporarily, while awaiting opportunities once the Korean geopolitical tensions have abated.
The Financials sector was by far the worst performer in Europe in August; we had reduced the whole sector earlier that month, due to prices hitting target, the strong current (overdriven) overweight positioning of the market participants and low LT interest rates. Any rise in the geopolitical risk premium could also affect the sector.
We downgraded Financials to neutral.
We overweighed Consumer Services and IT, as market growth remains driven by Technology.
We remain neutral on Consumer Discretionary (except Automobiles) and on Industrials, as they seem expensive, and, although growth remains moderate for this sector, we have quality companies.
We underweighted the Automobiles subsector and the media, as figures remain poor, and as potential disruptions and regulatory constraints/sanctions might be massive.
Within Materials, we observe that Miners are more influenced by short-term policy measures than by pure macroeconomic data (higher levels due to environmental measures in China before the winter); so we underweighted Materials.
Once again, Technology remains the driving sector, with a more-than-3% return over the month, and 25% on a YTD basis.
Earnings revisions on Health Care lost some ground, but the sector continues to outperform and remains one of our favourites.
Telecoms and Energy were – again – the worst performers of the month; we do not see any value creation in the Telecom sector.
Our US tactical sector allocation remains unchanged:
We underweighted Telecoms due to the absence of potential, and Consumer Discretionary, as prices are globally high and earnings revisions not supportive
We are neutral on:
We overweighed Technology – as semi-conductor and guidance results remain excellent – and Health Care, due to the strong M&A activity in the Biotech subsector. We also overweighed Industrials, as the sector should be supported by the weak USD.
Latin America, driven by Brazil, was the best-performing emerging region in August, Asia the worst, due mostly to the geopolitical tensions in Korea. India, in our view, remains expensive and has performed poorly.
Our overweight on Materials – the best-performing sector – paid well in August.
In view of the Korean crisis, we downgraded South Korea to ‘neutral’, out of caution, and raised Brazil’s grade to ‘overweight’.
For the rest, our allocation remains unchanged:
We overweighed China, on solid global growth data, and underweighted Mexico due to their complicated relationships with their powerful neighbour (the US).
We overweighed Industrials, to be consistent with our moderate bullish views, and Technology, which remains a very strong driver in the Emerging Markets.