Strong US economy is driving domestic consumption

The US equity market posted a positive performance over the course of November (converted in EUR). To that extent, although their performance lagged that of the European and Japanese stock markets, it was better than that of the emerging markets. Regardless, US equities experienced a somewhat turbulent month.

The first few days of November saw US stock indices continue their rise, as the risk-on rally was fuelled by satisfactory economic statistics. This positive spirit somewhat reversed during the following week. The USD appreciated, vs the EUR in particular, as a result of more widespread expectations of an imminent US rate rise. This was taken negatively, as such a movement was seen as likely to penalise US exporting companies. This slight consolidation phase was aggravated by economic data outside of the US, which appeared mixed.

Fortunately, the US equity market was able to brush off those fears pretty quickly. It resumed its upward movement in the third week of November and almost entirely erased the drop experienced the previous week. This was mainly due to the release of the FOMC meeting minutes, which clearly pointed towards rising rates.

• Investors are seeking quality stocks only and so we are in a situation where quality companies are expensive and all the other stocks are highly volatile and reacting to any tiny market announcement.
• Compared to the end of October, we have significantly increased positions in our US assets.
• Given the macroeconomic situation, we have predominantly increased our positions in IT and, to a lesser extent, Financials.
• Due to the current level of oil prices, we have reduced our positions in Energy.
• Sector-wise, we remain positive on Health Care even with the current political risk still hovering over the sector.
• In Consumer Discretionary, the Automobile segment seems to be top of the cycle. Although Hotels and Luxury Goods are suffering from poor sales, Amazon is driving the whole sector up.
• In Financials, we are positive on the major US names as they are less exposed than more regional banks to the difficulties of the Energy sectors (several small, mid-sized and large US E&P companies have credit ties with regional financial companies).
• As Capex is still lagging, we are staying clear of the Industrials and Materials sectors.
• In our portfolios, we have raised or initiated positions in, among others, Estee Lauder, JP Morgan, Waste Management, Texas Instruments, Alphabet, Visa and Citi, reducing positions in, for example Priceline and Starwood.
• Our largest active positions are Citigroup, Estee Lauder, Johnson & Johnson, Ingersoll Rand, Pepsico and Stanley Black & Decker.
• The IMF expected world economic growth forecast (of around 3.1% in 2015 and 3.6% in 2016) was revised downwards recently, but probably remains a little too high. However, it is still way too early to favour a global recession scenario (US and European macro data are still strong).
• We continue to believe that our portfolios should be cyclically oriented. Combined with low interest rates, reasonably priced equity markets, high free cash generation, increasing dividends, stock buy-backs and a lot of M&A activity, the environment for rising equity markets is still in place.