Value sectors exposed to the global economy should rerate in the short term

EUROPE STRATEGY

European equity markets had a poor January. All indices fell heavily in the first fortnight, before staging a timid rebound off very low levels in the second. Clearly, global and macro factors were at play to trigger such a powerful downward movement. Indeed, US and Asian stock indices also dropped sharply during the same period.

Fears regarding economic growth in China contributed greatly to this pessimistic climate. Another area of concern is the renewed sharp fall in the oil price. The rapid drop in commodity prices led to worries on the corporate side (e.g. reduced capex at oil companies, reduced capital-goods company orders, etc.).

As the earnings season had not really started in Europe in January, micro-economic news was scarce, and hence offered not much to offset such a macro-driven, global, powerful downward trend in the equity markets. Fortunately, the ECB provided European markets with some relief towards the end of the month, when Mario Draghi delivered a dovish message hinting that interest rates were expected to remain at present “or lower” levels for an extended period of time.

Overall, the European equity markets were down significantly in January, as the small rebound in the second half of the month did not fully offset the dreadful start to the year.

• We took the opportunity of the sell-off to increase the beta of our funds.
• We remain overweight in Consumer Durables (Luxury), and have significantly increased our exposure to Materials (Chemicals, Mining) and Energy.
• These purchases were financed by reducing our exposure to Consumer Staples (Food, Beverage and Tobacco) to underweight and reducing our exposure to Health Care.
• The market remains underinvested on this segment, but we remain positive as there are no threats on future earnings.
• We remain deeply underweight Industrials, as valuations are not justified by current guidances.
• Value should outperform in the very short term as the valuation gap between value and growth is very high.
• Value sectors exposed to the global economy – like Energy, Mining and Chemicals – should rerate, for valuation reasons and because of the very high short interest in the markets.
• We expect the luxury sectors to rerate after a strong earnings season.
• In the Financials sector, we see Banks as deep value and continue to like the Real Estate segment, given the low interest rates.
• We are confident in our positioning on consumer-related segments and are maintaining a fairly neutral stance across segments.