Central banks remain a driver for US markets

US STRATEGY

US equities fell sharply in the first fortnight of January, before recouping some of their losses in the second. Investors were still digesting the first rate hike by the Fed, which took place in December, but they also worried about the status of the global economic recovery in general and about the slowdown of growth in China in particular.

US economic data published early January were also not really encouraging. Notwithstanding December’s strong US employment growth, other economic data generally suggested softening economic momentum into end-2015. Industrial production and durable goods shipments data slowed further in December while regional manufacturing surveys since the start of 2016 have shown further deterioration. Financial conditions, too, have tightened.

The market, however, rebounded in the second half of the month, recouping part of the losses, thanks to dovish comments from the Fed, the ECB and the BoJ.

All in all, looking at the volatility and performance of the equity market in January, investors were left with a bad taste in their mouth.

• From a sector point of view, we took advantage of the low oil prices to increase our positions in the energy sector. Large caps are holding up well and share prices are at low levels. The market seems eager to go more cyclical.
• We reduced the exposure to Industrials and IT, and started to take profit in Consumer Staples to reinvest in Consumer Discretionary. Industrials should benefit from low oil prices but earnings and earnings revisions are still disappointing.
• We raised or initiated positions in, for instance, Schlumberger, Nike and Starbucks, while reducing positions in, among others, Waste Management, Ingersoll, Texas Instruments and Delta Airlines.
• Our largest active positions are Alphabet, Occidental Petroleum and Medtronic.
• The IMF expected world economic-growth forecast of around 3.4% in 2016 and 3.6% in 2017 seems very challenging in the current environment. Even if it is still too early to adhere to a global-recession scenario, the probability thereof, whilst still low, is creeping up, hence our more defensive approach.
• The low interest-rate environment, reasonably priced equity markets, high free-cash generation, increasing dividends and stock buy-backs, M&A activity and decent Q4 results still warrant a cautiously optimistic scenario for the equity markets.