Market expectations seem very reasonable for Europe

• The US, Japan and Emerging Markets continued to perform, while Europe slightly lagged.
• Market expectations seem very reasonable for Europe, which we consider positive; earnings revisions in the US were boosted by the tax reform approval.
• EPS growth is expected to be higher in the US this year, with no major changes for the euro zone; it will be lower this year for the EMs (which continue, nonetheless, globally, to record the highest growth rate).
• More volatility in December, combined with outflows mostly in the US and, to a lesser extent, in Europe, while EMs continue to benefit from global inflows.

We have a neutral stance on US equities. The US economy is bracing for its strongest growth this decade and for an increase in inflation pressures. US growth has already been accelerating since the turn of the year, even ahead of the tax cuts, and this will benefit companies’ earnings. As a result, the Q4 earnings season will be key.

• Information Technology and Energy were the top performers. Utilities suffered massively, while Consumer Staples lagged.
• Earnings revisions – including strong revisions for Financials – were supportive in the US.
• Earnings growth and price-earnings-to-growth were supportive for IT, Financials and Materials, while Real Estate was the worst sector.
• We are OW IT and Financials, and there were no particular outflows last month.
• Within Financials, we are overweighting banks (as the higher interest rate will benefit the sector), while downgrading consumer staples (negatively correlated to the interest rate).
• We are OW Energy, as demand is recovering, while OPEC members continue to respect the oil supply.
• We have upgraded Industrials and IT to take advantage of the current economic environment (as the region is experiencing a return to full employment, we expect higher salaries and thus inflation; consumer spending combined with the tax reform might further support economic growth)
• We have upgraded our exposure to CDI to stay neutral and consequently profit from higher consumer spending.

European equities performed well in December, although still lagging other main markets. 

The best-performing sectors in Europe since the previous committee have been Energy and Materials; Consumer Staples has lagged while Utilities has suffered.

• IT earnings revisions are up, as are defensive stocks (except for Utilities).
• Earnings growth was supportive of Materials and Real Estate.
• IT is still considered expensive, while Consumer Discretionary and Materials look interesting in terms of valuation.
• Health Care stocks are underweighted by global investors and the sector undergoes some inflows.
• Small Caps still offer attractive investment opportunities, while IT has recovered from its November 2017 performance.
• We slightly increased our cyclical bias through a higher exposure to mid-caps and retail banks based in the south of Europe, as the earnings momentum is rather supportive.
• We stay UW Telco and Utilities – the latter might suffer from stricter regulation.   

We have a neutral exposure to emerging market equities. EM equities have performed well since the US fiscal tax reform passed, with improving fundamentals, an improving global cycle and US Dollar weakness.

• Turkey and South Africa were performers of the month while Mexico was the laggard, with “only” 2%.
• Health Care was again the best sector, followed by Materials.
• Political uncertainty might occur next year in EMs, eg Brazil, ahead of next year’s general elections, with no strong candidates in sight.
• There has been no major change in our sector allocation.
• IT and China remain the main drivers but we have accumulated some Value, with cyclical exposure; we have kept our OW on China, Brazil, Technology Health Care and Materials.