Technical correction on the markets but real economy fundamentals remain globally strong

• After a global positive trend in January, broad markets dropped early-February upon (slightly) disappointing job claims figures in the US at the same time as the VIX volatility index peaked at a historical high
• It seems to be more of a good excuse for a technical correction than a fundamental reversal
• Real economy fundamentals remain globally strong
• We remain constructive on equities but expect much more volatility in 2018
• USD weakness is weighing on European equity performance, but more due to FX booking rather than fundamental business issues

Weak USD & solid real economy

One of the major contributors to European equity underperformance was the USD weakness, but Financials and IT still supported the markets.

We are maintaining our active positions on retail banks in southern Europe and bringing our Insurance exposure up to ‘neutral’, in view of the potential upward moves of interest rates, and favour Personal Care Products.

We are avoiding ‘bond proxies’ such as Utilities and Telecoms, which could suffer from higher interest rates, and Media, as that sector has been devastated by the digital revolution.

Our next move on Technology could again be upward, through highly selective stock-picking in structural winners.

Higher interest rates & full-speed economy

With higher interest rates in the pipeline, Finance was one of the top-performing sectors; we have kept our overweight position in Banks. CDIs benefited from the full-speed economy, while Utilities suffered massively.

Earnings revisions in the US are supportive of almost all sectors, except Utilities and Real Estate.

We have reduced our exposure to ‘bond proxies’ such as Utilities and Real Estate, and are avoiding Staples (for the same reasons, + operational issues in the sector)

We have cut our tactical overweight on Energy, bringing back our rating to ‘Neutral’ and taking some profit, in consideration of the high valuations and the impact of higher interest rates on the demand.

Strong appetite from global investors for Emerging Markets

Global growth remains strong in  Emerging Economies, which should be less impacted by US interest rates, and strong inflows can be observed from global institutional investors towards Emerging Equities.

We have kept our constructive views on Emerging Markets, adding to Cyclicality, and – to a lesser extent – to Value.

Technology should remain a key driver in the coming months, as should China, by far the leader in terms of wealth creation.