17 OCT.

2018

 

European equities: Flat performance in September

Italian politics came back into focus this month, as Italian assets first rallied on a more conciliatory tone in the country, before dropping as political tensions reached a new level after the government came to an agreement about a deficit target for 2019 worth 2.4% of GDP.

The euro zone composite PMI fell in September but is still consistent with growth at a 2.1% pace. On a sector level, euro zone banks, supported by higher bond yields, rallied throughout the month and, although among the beneficiaries of the rotation into value, pared most of their gains as Italian politics deteriorated. Oil & gas and Basic Resources, lifted by higher commodity prices, ended as best performers. Technology dropped on US-China trade concerns while Defensives lagged overall as bond yields jumped.

We reduced our Consumer Staples exposure (mainly our HPC and Food & Beverage positions) but kept our overweight as fundamentals remained strong.

Despite the current situation in Italy, we are still ‘overweight’ Financials (via banks) and remain well diversified, with some Spanish banks benefiting from the LatAm rebound. We increased our mining exposure to neutral, supported by stronger demand from China infrastructure.

 

US equities: Mixed performance

US equities delivered a mixed performance over the course of the month to finish slightly higher. Trade tensions between the US and China continued to escalate while the US economy retained solid momentum.

Tech was a big area of softness as investors took profit in the sector following some cautious updates and Facebook/Twitter’s testimonies before Congress. Trade tensions between the US and China continued to escalate in September. The Trump administration announced plans to implement tariffs on another $200bn of imports from China, with the tariff rate initially set at 10% and scheduled to increase to 25% at the start of next year.

We decreased our Industrials exposure to ‘neutral’ in a context of geopolitical uncertainty that could postpone capex decisions. As certain companies from the Consumer Discretionary and Information Technology sectors will be combined with the existing Telecommunication Services companies to form the new Communication Services sector, we increased our Telecom exposure to ‘neutral’. We also increased our Health Care exposure as the sector is benefiting from the risk-aversion increase.

 

Emerging equities: Liquidity scare in Indian financials sector

Emerging markets underperformed developed markets as the US and China remained in the spotlight while oil prices rallied and US bond yields continued to rise.

Emerging countries once again underperformed developed countries in September. Latin America was the strongest region, while Asian countries were hit hardest. Escalating trade tensions between the US and China once again made headlines. The US threatened to tax an additional $267 billion in Chinese imports, on top of the tariffs already announced or implemented. In retaliation, China made a tariff list of $60 billion in US imports. Meanwhile, the Fed raised the fed funds rate by another 25bp. Energy prices climbed ever higher in September, with the Brent hitting its biggest peak since 2014 due to a series of supply shocks (sanctions in Iran, crisis in Venezuela, etc.).

India was the worst performer in September, recording the worst month since the August 2013 Taper Tantrum triggered by the financial sector. Investor scepticism stemming from defaults by non-banking financial companies spread to other sectors, especially those with the highest valuations. These emerging concerns over credit and liquidity problems plaguing the non-banking financial sector, as well as potential contagion, also did a number on market sentiment.

The higher-than-expected rate hike by Turkey’s central bank (in a bid to curb inflation and capital flight risks) restored investor confidence. Brazil outperformed in the wake of several political events, including the Electoral Court’s rejection of Lula’s appeal to run and the announcement of Fernando Haddad’s candidacy, while Bolsonaro was stabbed while campaigning on 6 September. At the Third Inter-Korean Summit, South Korean President Moon Jae-in and North Korean leader Kim Jong-un signed a peace agreement that included specific denuclearisation measures aimed at bringing the war on the Korean peninsula to a de facto end.

We kept our ‘neutral’ position in China (but with a negative bias) as escalating trade tensions between the US and China were still in the spotlight. We reduced our exposure to India as sentiment had become more negative on this expensive market combined with higher oil prices and a weak currency. We increased our exposure to ‘overweight’ in Brazil as the election cycle turned more benign, with Bolsonaro in the lead for the second round. We also increased our Mexican exposure to ‘overweight’ following the USMCA agreement and with the region a potential beneficiary of the US-China trade war. In terms of sector allocation, we increased our Materials exposure to ‘overweight’ on the back of China infrastructure stimulus while increasing our Telecom exposure to ‘neutral’ following a risk-profile downgrade.