We reduced our cyclical exposure

European equities, supported by the European Central Bank’s quantitative easing programme and improving economic data, continued their early-year rally. Automobiles, Healthcare and Financials (especially banks and insurance) outperformed the broader market, while Energy, Telecom and Utilities continued to underperform.

In our European funds, we decided to reduce our exposure to more cyclical sectors before the start of the Q1 2015 earnings season, which, we believe, will be quite difficult, as expectations are high and currency effects (weak euro) fading.

• We have reduced our exposure to Consumer Discretionary. The rebound of the automobiles sector was too strong too fast. We now clearly see a downside potential, making us implement an underweight in the sub-sector. Separately, we also slightly reduced Consumer Durables. Although the market still has a massive underweight, the sector will have difficulties delivering.
• We have cut our overweight in Industrials to neutral. The sector will face headwinds from challenging capex in Oil & Gas, Mining & Metals and Utilities. Also, given the sector’s important emerging market exposure, weaker-than-expected economic growth in the region could have an important impact on revenues. We have therefore decided to take profit before the earnings season.
• We have maintained our neutral stance in Financials. Banks should benefit from a positive short-term dynamic with an improvement in lending. However, they are not yet cheap, justifying our neutral positioning. We continue to prefer asset managers, such as Azimut, to banks.
• On the positive side, we remain clearly upbeat on real estate, in which we prefer German residential names to commercial ones and favour shopping centres. We remain positive on Unibail, Deutsche Wohnen and Grand City Properties.
• We have maintained our negative stance on Utilities. The market still has a slight overweight in the sector, which is still facing regulatory issues and suffering from a lack of growth.
• Our most important overweight remains Technology, with, for instance, Hexagon and Halma.