24 SEP.

2018

Temas , Renta variable

Robust economic environment, despite increasing trade-war risks, solid earnings growth and attractive valuations

 

European equities: slower, but robust and self-sustained, expansion in the euro zone

European equities delivered a weak performance in August, as concerns emerged on the Italian coalition, the ongoing Brexit talks and Turkey’s economic problems, which could spill over into the euro zone.

Some European banks, in particular BBVA, BNP and Unicredit, dropped after news reports said the ECB was concerned about European lenders’ exposure to Turkey. The Turkish lira dropped on investor concerns about the country’s financial health, a shock that triggered sharp falls in other emerging-market currencies, hit the euro and pushed the dollar to a 1-year high.

On a more positive note, expectations rose very strongly in Construction and Services, suggesting a broad-based economic improvement. The Euro area composite PMI showed a decent outcome, which reassured about both the level of growth and its momentum.

As entry points rose and decent leading indicators appeared, we increased our Financials exposure (via banks) to ‘overweight’, following a positive discussion about the Italian budget and the Brexit. We increased our auto exposure to ‘neutral’ for valuation reasons while maintaining our underweight in Consumer Discretionary in Europe, particularly in the Luxury Goods sector.

We downgraded our neutral position in Chemicals to ‘underweight’ as we have less potential upside and over-positioning by investors, while keeping our strong ‘overweight’ in Consumer Staples, where there is good visibility on margins.

 

US equities: the US, again, outperforms

US equities continued to outperform, supported by the end of a solid Q2 results season, stable economic data and diminishing trade risks, thanks to the closure of a deal with Mexico.

We increased our industrials exposure to be ‘overweight’ in a context of strong economic data and positive earnings revisions. We increased our Consumer Staples exposure to ‘neutral’ in expectation of global consumption peaks during the summer while keeping our cyclical bias in the US, in a context of high-quality growth, low unemployment and high productivity. We shall closely monitor the case of a style rotation towards more defensive stocks in the following months amid higher interest.


 

Emerging equities: weaker EM Currencies

Emerging markets ended the month in negative territory, with US sanctions, trade tariffs and the risk of contagion among emerging economies hogging the headlines.

Emerging markets underperformed global equities, exacerbating the YTD downward trend that paused temporarily in July. Asia was the best-performing region, while EMEA and LatAm fell strongly. Despite good news on economic growth and a strong corporate earnings season, the market remained constrained, with a conservative view on EMs driven by the contagion effect from the Turkey and Argentina crises.

Risk aversion on the persistent trade climate also weighed on EM equity valuations. Turkey suffered the most as the TRY weakened sharply. The new government did not make any significant policy announcements nor did the central bank raise its benchmark interest rates in August. The Brazilian market also fell, due to the approaching elections and ongoing Turkey and Argentina crises.

Chinese equities underperformed emerging markets as the US considered imposing further tariffs on $200bn of Chinese goods. This was followed by a domestic macro deceleration and a CNY depreciation. Macro figures surprised on the downside, with infrastructure FAI growth recording a low unseen since 2012.

In a context of geopolitical tensions, political uncertainty and a risk of contagion in emerging markets, we reduced our ‘overweight’ in China and our IT exposure to ‘neutral’ amid an escalating trade war. We also reduced our ‘overweight’ in Russia to ‘neutral’ (following the imposition of US sanctions on the region) while increasing our ‘overweight’ in India (as the region is less sensitive to trade war). All in all, we reduced our growth exposure in favour of value stocks and regions/companies that are more exposed to domestic rather than overseas markets.