European equity markets rose in July, quickly brushing off the negative surprise generated by the “Brexit” vote in the UK. Although such an upward move may sound surprising, occurring so soon after the UK referendum, this (albeit limited) rally is due to various factors.

Firstly, it directly follows the upward, though limited, trend experienced in the last few days of June, once the initial “Brexit” referendum shock had been digested. Investors were taking the view that central banks and governments across the world would take accommodative measures to help face the negatives of the “Brexit”.

Secondly, the quick appointment of Theresa May as new UK Prime Minister lifted some of the uncertainty that could have plagued equity markets.

Thirdly, much of the economic data released in July points, overall, to a broadly decent picture as far as global economic growth is concerned. This does not mean that all indicators were satisfactory. Nonetheless, the few disappointing figures did not prove bad enough to spoil the European equity markets’ party, especially as the ECB kept all key policy rates unchanged and reinforced its forward guidance of interest rates, which are expected to remain low for the duration.

In addition, the earnings season for European corporates proved OK in July, with the usual suspects for disappointment (e.g. banks) offset by good news on the Luxury sector front, for example. Even the saga around Italian banks, which are suffering from non-performing loans, did not greatly destabilise, as hopes emerged of a remedy being found by hook or by crook.

  • Following the “Brexit” result and the overall market rebound during the month of July, we have decided to gradually invest the cash in our portfolios.
  • We have raised our stakes into quality and into cyclical companies.
  • We have raised our Technology bias mainly towards Software companies (SAP – increasing growth in cloud and services). We also remain positive on quality companies likes Halma and Hexagon.
  • We have started a new position in Assa Abbloy, a quality company with relatively strong growth targets from electrical locks and other security devices. Organic growth is currently running at 4-5% and the company has high and stable margins, reflecting the strong brand positioning and the payback from recent restructuring efforts.
  • We have also raised our positions in cyclical stocks like Ryanair and in the banking and automobile segments.
  • In Financials, we maintain our short Insurance and long Real Estate while overweighting retail banking. We have added quality names in the Benelux – ING and KBC – as these companies have a high market share in their respective markets and decent growth perspectives. Valuations are also attractive.
  • In Consumer Discretionary, although we remain mostly neutral, we have reinforced our allocation in BMW. This quality company is relatively cheap, has a good model cycle and excellent growth prospects.
  • We also remain positive on Health Care and Materials, on a case-by-case basis.
  • We remain neutral on Consumer Staples, where earnings results have been decent.
  • Our short positioning in Telecoms and Utilities is starting to reap rewards.
  • Our strategy is focused on companies that should beat, or at least be in line with, the consensus in the coming quarters. It is these companies that investors will seek out and which will see their risk premium reduced.
  • Our strategy should therefore be able to progress in absolute terms, given the historically high risk premium for European equities.

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