In Europe, equities suffered a slight correction and consolidated after their breakneck rally in December. Encouraging signs, such as earnings growth, German industrial output and French consumer indices are good market supports, but some investors, non-European ones in particular, continue to look askance at elections looming ahead in France, Germany and the Netherlands and the undercurrent of populist sentiment that could come with them.
Our feeling is that these fears are sometimes overblown and that the lifting of these uncertainties could create opportunities when the elections actually occur.
- Our cyclicals bet, in automobiles in particular, paid off, and we took our profits on these positions and scaled back our exposure. As a result, we are now underweighting the European sector.
- We are holding onto some cyclical biases, particularly via luxury goods, but our overall exposure to consumer discretionaries is back to neutral.
- Financials, or at least certain banks, are attractively priced and remain prominent in our portfolios, with the steepening in yield curves providing an additional argument.
- For the moment we remain neutral on energy, which we are keeping a close eye on, due to medium-term risks. However, we are raising our exposure to food and drinks and, hence, to consumer staples in general.
- Lastly, we continue to steer clear of telecoms and utilities, which will clearly remain underweighted in a rising interest rates environment.