Sector diversification, key to seeking alpha in European

The first fortnight of the month saw risk aversion return to haunt equities. This occurred just as the sharp drop in the oil price was dampening nominal growth expectations. All risky assets suffered from this, not just European equities: the credit markets saw, inter alia, spreads rising sharply and volatility surging. The ECB’s downward revisions to its GDP growth and inflation projections did not help, either.
Those fears receded in the second part of the month. Risk appetite rebounded globally, as concerns about Russian default risks and energy-sector credit stress abated. On the back of various additional comments by ECB officials, investors also regained hope that a sovereign Quantitative Easing programme would take place in early 2015.

• Our portfolios remain balanced between quality growth stocks and income-generating cyclicals.
• We remain structurally long on Real Estate (Unibail) and short on Banks and Insurance. We do not see any profitability yet in European insurers.
• Our second main orientation goes to USD-exposed exporting companies vs domestic ones.
• As for segment allocations, we remain positive on Luxury goods and have slightly reduced the Automobiles segment.
• We have also slightly reduced our exposure to Healthcare as there is a lack of visibility.
• In the Consumer Staples segment, we are less keen on Food retail as there is not enough pricing power. For instance, there is a structural problem in the UK, where the likes of Tesco are facing huge competition from low-cost retailers like Aldi and Lidl. We are more positive on food producers, and HPC (Reckitt Benckiser and Beiersdorf) remains our strongest bet.
• We have reduced our short on energy (through Total and Statoil) and have bought some mining companies (including BHP Billiton).
• We remain positive on Technology but only on niche players.
• Globally, we have increased our position in high-quality Smalland Mid-cap names like Viscofan (cheap and with healthy, structural growth) and Corian.
• We are fully hedged on currencies (especially regarding GBP) and have increased the beta to around 1 in all of our main portfolios.
• In the current environment, and taking into account the lowgrowth perspective, companies in which we are invested, and which offer visible growth little dependent on the macro context, will continue to outperform