Except for the weakness of the dollar, most European data are positive.
Although some major consumer companies have had their “bad quarters”, and are still “underowned” by investors, that it is now behind them, and they may face resurging market appetite.
That is why we have raised our exposure to some Food & Beverage companies, and in the Household & Personal Products sector, although we are still avoiding the Food Retailing sector.
We are closely watching Banks – and Financials in general – as they have been on the receiving end of huge investor appetite (perhaps to the point of indigestion) and are now at least fairly priced.
We have liquidated some positions to raise cash, very temporarily, while awaiting opportunities once Korean geopolitical tensions abate.
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.
For the rest, we still favour Consumer Services companies, and, of course, Technology, which is still driving the markets.
Cyclical sectors continue to benefit from the good shape the US finds itself in, despite the hurricanes; our global positioning is also, as before, in equally good shape.
Another main driver of the US markets is the hope that the Trump Administration will implement a (more concrete?) tax reform.
In such a context, our US tactical sector allocation remains unchanged:
We remain underweight Telecoms due to the absence of potential, and on Consumer Discretionary, as prices are globally high and earnings revisions unsupportive.
We are neutral on:
We continue to overweight Technology – the best sector by far year-to-date – and Health Care, due to the strong M&A activity in the Biotech segment. We also overweighted Industrials, as we are pro-cyclical.
September showed a temporary reversal of a multi-month uptrend, being the first month in which Emerging Markets underperformed the Developed Markets. Higher US bond yields, supported by the prospect of a US tax plan and Fed tightening, supporting the US dollar, combined with declining metal prices and higher oil prices following the Kurdish referendum, impacted emerging-market performance. China weakened slightly towards the end of the month as investors liquidated their positions, taking some profits after the first ratings downgrade from S&P since 1999 and some tightening measures in the property sector. Indian equities faced some pressures, due to currency losses, as the economy is suffering from a slowdown in growth, a worsening fiscal and current-account deficit and deteriorating bank balance sheets. While the tech sector supported Korea, the disappointing launch of the iPhone 8 and X affected Taiwan equities.
LatAm outperformed, led by the Brazilian market, where a 100bp interest-rate cut supported the economic recovery.
Our allocation remains unchanged:
We are overweight China, on solid global growth data, and underweight Mexico due to their complicated relationships with their powerful neighbour (the US).
We are overweight Industrials, to be consistent with our moderate bullish views, and Technology, which remains a very strong driver in the Emerging Markets.