If global growth has resumed its synchronisation, it is at a lower point for the euro Zone than expected. The major headwind is the rise of euro scepticism: “Brexit”, negotiations with Trump on various trade relations, including automobiles, Italy and their new budget plan, which will either be in line with the EU fiscal rules or rake up even more debt and has already caused a short-term debt sell off of Italian bonds. However, on the bright side, July shows that in terms of economic surprises, the regional momentum has turned more favourable for the euro zone, justifying our cautious position for the time being.
Europe ex-EMU equities
We remain negative on ex-EMU equities as they have the lowest expected returns. We recognise the “Brexit” impact on the domestic economy and weakening domestic fundamentals.
In terms of sectors
Best performers during the month included Healthcare, thanks to strong earnings, guidance upgrades and rotation from cyclicals. Financials were also helped by German Bunds breaking out of their recent range on mostly positive economic data. Basic Resources were dragged down by weakness in commodity prices as global trade anxieties and CNY depreciation weighed on Chinese demand.
In this context, we maintain our underweight in Consumer Discretionary in Europe, in particular in the auto and luxury good sectors for fundamentals and valuation reasons respectively. We keep our strong overweight in Consumer Staples with good visibility on margin while keeping our underweight in Utilities, Telecom, Consumer Discretionary and Materials. We have cut our overweight in European Real Estate, as while we favour semiconductor stocks within the IT sector, as they offer double digit growth.
US economic momentum is boosted by fiscal stimulus, while strong earnings growth and valuation around historical level are clear positives. We remain overweight, but have nevertheless started to take some profits as the US market appears toppish.
In terms of sectors
We keep our cyclical bias in the US, in a context of high quality growth, low unemployment and high productivity. We stay neutral towards industrials due to the trade war uncertainty that could postpone capex decision. We keep our neutral position in Financials amid stable interest rates environment while we monitor Real Estate and might cut our underweight in case of declining interest rates. Fundamentals remain strong and unchanged in our view for Health Care and IT stocks.
Emerging markets benefit from global growth and should recover with the stabilisation of the US dollar and valuations are attractive. The trade war with the US is a major headwind if it escalates.
In terms of countries & sectors
We downgrade our OW in Korea to neutral given the limited upside from export growth amidst global trade tensions, while we keep our overweight in India and Russia, as they are less sensitive to the current Emerging Markets volatility.
We stay neutral in Brazil despite its recent performance and underweight in Turkey amid political uncertainty.
Despite escalating trade tensions, we remain overweight on Technology and Healthcare as fundamentals remain strong and on Energy as the sector performed well.