Monthly management comment
Macro & Politics: “Catalonia’s referendum spills further shadows onEurope’s democracies”
As broadly anticipated Mrs. Merkel won a 4th consecutive mandate to lead the German government. Her victory was somehow overshadowed by the slamming entrance of the far-right party SPD into parliament. It is the first time since WW2 such a party is represented in the German chamber, highlighting the increased cleavage unfolding in Europe’s politics. Further political tension happened recently in Catalonia where hundreds of voters were victims of police violence just because they wanted to vote. We are concerned by the multiplication of social and political unrest as well as terrorist actions. Something seems rotten in our western society. Despite all these events, the overall economic environment remains positive with extended growth and mild inflation. Central banks are now at a crossroad and will start unwinding balance sheets and rising interest rates. Historically, tightening policies have often led to market turmoil, we should all be cautious as we enter the last quarter of the year.
Markets: “High complacency levels”
We are puzzled by the lack of reactions from current markets to political tensions mentioned here above. The month of September was particularly strong with some indexes such as Stoxx 50 and OMX 30 gaining more than 5% for the month. The lack of pessimism and the general level of complacency does trigger some warning signals. Market corrections mostly happen in such an environment and very often in the month of October. Keeping some cash and buying some puts is probably advisable. On the currency front, we have seen a considerable rebound of the USD after consecutive months of sluggishness. This should be welcomed by the European industry who’s having to cope with the long-lasted EUR strength. Short term interest rates are doomed to rise but bond markets do not foresee large movements on the long side of the yields. Aulien was up 1.2% in September and is up 3% YTD.
Investment Themes & Favorite stocks: “Sector rotation”
We continue to favor some sectors such as Financials (purchase of BNP Paribas, expecting new highs) and defense stocks (SAAB) on the back of rising yields and increased military investments. We also continue to add exposure to China (further purchases of BABA and CAF Etf) as we expect this market to continue on its growth trend and increased technological innovation. For the same reason we recommend holding an exposure to commodities (ETF and Yara).
In order not to increase our risk exposure we have taken profits in healthcare sector (Attendo) and insurance sector (Sampo). We are currently looking to allocate some assets into a long/short equity Fund as we wish to reduce some Beta from the portfolio.
Our current favorite stocks are: BNP Paribas, Saab and Royal Dutch.