Equity markets – La Française perspective

Consolidation in early 2014, but not for the reasons we expected, says La Francaise.

In November, we discussed the possibility of fresh volatility and profit-taking in the first quarter, in the wake of the taper. This scenario has in fact, at least partially, played out…but primarily because of revived concerns on emerging markets.

In Europe, January was the opposite of December. The first three weeks were marked by an increase linked to the usual optimism at the start of the year, but also because of easing long-term interest rates in peripheral countries and economic data that were, by and large, positive. But the trend was thrown in reverse after the publication of the lowest Chinese PMI in six months (under the all-important bar of 50) thus reigniting fears of a slowdown in the world’s second-biggest economy.

In the United States, the consolidation was particularly marked (-5.2% for the Dow Jones, which failed to play its defensive role, versus -2.2% for the MSCI Europe), despite good GDP figures and manufacturing ISM; macro-economic indicators revealed a few surprises on the jobs and housing fronts which should be kept in perspective given the inclement weather.

European shares are expensive, but continue to be the most attractive.
Yes, market valuations in the developed world are at 4-year highs and trading at 2007 levels (i.e. pre-crisis)… But, the better resistance of the European market in January tends to validate our preference for European shares in the short run.

Moreover, European corporate earnings are expected to grow at a faster pace than (+12.5%) than those in the US (+9.7%) or even in emerging markets (+11.6%). And for the time being, downwards earnings revisions on both sides of the Atlantic are on par (-3% over the last three months).

Cautious attitude prevails
Volatility could continue in the near term on account of the reporting season and forthcoming renegotiations on the US debt ceiling (ceiling frozen until February 7th). A fresh market rally in 2014 will only see the light of day if earnings growth becomes a reality.

Our investment strategy
We are maintaining an overweight stance and stock-picking approach on the following sectors: automotive (recovery in European manufacturing), finance (profitability has improved, balance sheets’ have been cleaned up), technology (robust growth) and healthcare. We continue to be cautious on agri-business and household products (negative impact of Asian and Latin American currencies). Considering that EM currency depreciation could continue due to current account imbalances, we are focusing on growth models driven by domestic growth and are reducing investments in stocks that are exposed to emerging markets, particularly Latin America.

Focus of the month: European stocks’ exposure to Latin America
We count around 50 companies that have significant exposure (more than 15% of sales) to Latin America, including a number of Spanish companies in the banking, telecom, construction and retail sectors.
Read more details for other asset classes in the attached newsletter.

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