23 JAN

2017

Equities, Monthly Strategic Insight, Topics

Strong rebound in December, rising interest rates

In Europe, equities rallied on hopes that the region would benefit from a stronger US economy and from the weaker EUR against the USD and, last but not least, from a supportive ECB policy.

There was also some progress in stabilising the Italian banking sector, which had been a source of concern for investors. On 8 December, the European Central Bank Governing Council decided to add more than half a trillion euros to its bond purchase program and extend it by nine months until at least the end of 2017.

ECB chief Mario Draghi declared that this supportive programme will not end any time soon.

As we anticipated last month, cyclicals like consumer discretionary and energy were the winning sectors in Europe over December

Cyclical bias and rising interest rates remain strong drivers for our tactical positioning:

  • ˜We remain overweight banks, which should continue to benefit from wider spreads between short-term and longer-dated yields, and which still have some room to rise, at least among peripheral markets
  • We are remaining overweight on most of European cyclicals, such as the luxury goods sector and discretionary consumer stocks, but adopting a more opportunistic approach, meaning that we could change our positioning if new highs are reached.
  • The healthcare sector, despite Donald Trump’s tweets, remains one of our heaviest weightings.
  • We are continuing to steer clear of telecoms and utilities, which are likely to remain weighed down amid steepening interest rates.