24 JUL

2018

Equities , Asset Class

We favour EMU small caps, and US and Emerging equities

European Equities

EMU equities

Although the region is still showing solid fundamentals, there remain uncertainties (potential trade conflict with the US, weaker activity indicators). Ending its QE on 1 January 2019, the ECB is not expected to consider hiking its rate until the summer of 2019. We prefer small and mid-caps to large caps as they are less sensitive to the current events.

Europe ex-EMU equities

We maintain a negative stance, as expected earnings growth is below that of other developed markets and the risk premium is still at stake due to the Brexit negotiations.

In terms of sectors

We continued to see meaningful dispersion among themes and sectors in June. The month’s best performers included utilities, food & beverage, and healthcare. Worst performers, by contrast, included cyclicals, e.g., autos, resources, construction and financial services. Autos, in particular, suffered from the combination of trade tensions, rising input costs and product disruption from the new, more complicated emission tests being implemented across Europe.

As in the US, the continuing trade tensions justify a more cautious stance on industrials, as companies will probably postpone investments. We remain, on the contrary, neutral on European financials due to the lack of any clear interest rate trends. We are nevertheless considering increasing our exposure to the sector, due to the more attractive valuations.

US Equities

We are positive on US equities, which are benefiting from the strong economic momentum and earnings growth, and valuations that are around the historical average.

In terms of sectors

The first weeks of June were marked by several major events (three central bank decisions, the Trump-Kim summit, AT&T-TWX approval, China tariffs) that drove the S&P towards the upper end of its trading range. At this month’s FOMC, the Fed hiked the funds rate target by 25bp, to 1.75-2.00%. More notable was the guidance about the path of future rate hikes, which changed to a modestly more hawkish direction. The economic forecasts also leaned hawkish, as the unemployment rate projections were lowered, while the sustainable rate of unemployment was left unchanged. On the back of stable interest rates, we have maintained our neutral position in Financials.

Later in the month, US equities came under pressure, as trade continued to dominate the narrative. The on-going US-China conflict and risk of a tariff war weighed on US stocks. On 15 June, US President Trump approved the final list of tariffs on $50bn worth of Chinese imports, and China retaliated with tariffs of the same scale and intensity. The intensifying trade tensions have been instrumental in our decreasing our exposure to US industrials. Companies might postpone their investments due to trade uncertainties.

In this context, we remain positive on the defensive healthcare sector, which is benefiting from decent fundamentals, while preferring the less trade-sensitive social media stocks within our technology exposure.


Emerging Equities

Emerging equities, now integrating a substantial geopolitically related risk premium and supported by strong global growth and resilient double-digit earnings growth, should rebound in the coming months, thanks to a significant commodities and technology exposure.

In terms of countries & sectors

Due to intensifying trade tensions, we have slightly reduced our conviction on China, though maintaining an overweight. Growth figures are still in line with the central bank’s target, and valuation has become attractive. In addition, the inclusion of Chinese A-shares in the MSCI index might support the Chinese equity market.

India outperformed the region, though remaining under pressure, as crude oil prices moved higher, despite OPEC announcing that they were going to increase supply by 1 million barrels per day. However, as India is less sensitive to emerging market volatility, we have increased our exposure.

From a sectorial point of view, we have reduced our materials exposure, with commodities under pressure due to the trade conflict.