Stock selection remains key

The European equity markets finished April almost unchanged. Such a pause was not totally unexpected after the strong gains experienced over the first quarter.

Falling euro zone government bond yields resulting from the ECB’s asset purchase programme helped to propel European equity indices higher in the first part of the month. In addition, the start of the results season did not spoil the European party. Far from it, in fact, as so far companies have posted overall encouraging results.

The European equity markets turned south in the latter part of April and the key factors driving this turnaround were numerous, as some of the inputs that had fuelled hopes of a strong rebound in European corporate earnings reversed. The EUR regained some ground, finishing the month close to the 1.12 level. Geopolitical issues (Greece, UK elections) also resurfaced to induce investors to take some profits.

• The earnings season in Europe was positive and better than in the US. The best performing sectors were the cyclical ones. EPS growth is more favourable in the euro zone as Great Britain is lagging the rest of the continent.
• The strong USD is having a major impact on the Healthcare sector and the low level of rates throughout Europe remains favourable for Real Estate and is a strong driver for M&A deals (see the recent news over talks between Delhaize and Ahold, for instance).
• Globally we remain fairly neutral across sectors as we are in a stock-picking environment.
• As for our major thematic bets, we are still positive on Real Estate, Household & Personal Care, Food & Beverage and Technology while remaining strongly negative on Telecommunication services and Utilities
• In Technology we discarded some niche players and in Financials we have reduced some Banking stocks while HSBC was driving the sector the last few weeks. Our main preferences are for Lloyds, KBC and Intesa San Paolo.
• Within Industrials the earnings season was disappointing (Schneider and Legrand showing negative growth).
• We have maintained our negative stance on Utilities. The sector is still facing regulatory issues and suffers from a lack of growth.