Market Complacency over the last number of months has surprised the European Equity desk. This complacency was likely predicated on two factors – investor sentiment around global growth improving somewhat and a view that central banks would provide greater support given the uncertainty following Brexit. Neither of these arguments are particularly convincing and recent narrative from central banks appears to support our interpretation. With valuations fuller – the market is vulnerable to any event-driven risk. Political risk, in particular, is not priced into equity at this point. With the forthcoming political calendar event-heavy – this dynamic is unlikely to last for long.
Focus on Idiosyncratic Opportunities
Despite the rather unimpressive return from the market YTD, the number of rotations within the market has been erratic, as investors struggle to identify clear drivers and direction. In this environment, the requirement to keep a balanced portfolio is clear, with capital preservation as important as alpha generation. Cognisant of this difficult market environment, we believe that individual stocks’ ability to withstand market volatility and deliver against an uncertain backdrop is crucial. In this context, the European Equity team is focusing on two key themes:
- Quality companies exhibiting evidence of earnings growth and
- Idiosyncratic stories where we believe management action will enable greater profitability.
Range-Bound Market to Continue
The market continues to demonstrate impressive resilience in the face of a lot of uncertainty. Brexit is a clear negative for growth. This, combined with many political events, may weigh on markets over the coming quarters. Clearly, as evidenced by the performance of cyclicals during the summer, there is selective appetite for risk. The Eurozone market has remained in a wide trading-range for nearly 2 years seeking better global growth and earnings growth to break out of this range. With the ECB remaining a provider of liquidity and some support – we see limited downside. In our view, for a sustainable push higher to occur, earnings growth must return. In the short term, we would expect this to be single stock driven.