Sector diversification, key to seeking alpha in European equities

February also saw the corporate results season gaining momentum. Overall, reported earnings proved reassuring and consequently acted as a further boost to European stocks. Indeed, there were more European companies surprising positively on Q4 reported sales earnings than the opposite, and more companies posting positive earnings than otherwise.

Overall, the spread between the numbers of good vs. bad surprises was reassuring.

• Our portfolios remain balanced between quality growth stocks and income-generating cyclicals.
• Our second main orientation: USD-exposed exporting companies vs domestic ones.
• Within Financials, we remain focused on retail banking, mainly through names with a certain quality, such as BBVA and Intesa Sanpaolo. This segment is really stock-specific. Scandinavian names remain expensive, so we prefer Spain and Italy.
• With respect to particular sectors, we continue to strongly underweight Insurance, as we believe investors are underestimating the impact of long-term interest rates on this sector.
• On the positive side, we remain clearly upbeat on real estate, even though we have slightly reduced our allocation in some names. We remain positive on Unibail, Deutsche Wohnen and Grand City Properties. We prefer German residential names to commercial ones (no UK exposure due to UK 10Y rates) and shopping centres.
• Within Consumer Discretionary, high-end Luxury Goods are up, mainly in France and Italy (De’Longhi). The media segment is overcrowded.
• We remain positive on niche players in the Technology space (Halma, Amadeus, Hexagon). Investors are willing to pay for “quality” players.
• We have maintained our negative stance on Utilities, which still face regulatory issues.
• In the current environment, and taking into account the lowgrowth perspective, companies in which we are invested, and which offer visible growth little dependent on the macro context, will continue to outperform.