European equity markets: bounce or real recovery?
- Pfizer's vaccine announcement triggered a spectacular turnaround in trends established since the Covid crisis first broke
- Europe’s equity markets, which had already put on nearly in the 7 per cent first week of November, nearly repeated the feat, rising 5.4 per cent last week
- With vaccines on the horizon, the prospect of a synchronised global economic recovery in 2021 looks much more credible. Investors may therefore continue reweighting towards marked-down companies over coming months
- We think European equity markets still have upside in the next twelve months
- Cyclicals are growing earnings fastest, often at twice or three times the pace of quality and growth stocks
- Since the start of November 2020, the performance of HSBC GIF Euroland Equity has been boosted by Pfizer's announcement and a resurgence in risk appetite
European equity markets mounted a big rally at the start of the week. What happened?
Europe's equity markets were already heading upward since the start of November (MSCI Europe dividends reinvested up 6.9 per cent in euros between 30 October and 6 November) on an unexpectedly strong Q3 earnings season and the likely shape of the next US administration, despite lingering doubts.
Then, in the week after 6 November 2020 markets near doubled their gains, adding 5.4 per cent. On Monday, Pfizer and BioNTech announced their Covid-19 vaccine had achieved excellent results in the first phase of pre-marketing analysis and could be on the market before New Year.
The news revived credible hopes of a synchronised recovery by the world's big economies in 2021, hopes that had taken a bashing from the second wave over recent weeks. This triggered a spectacular turnaround in trends established since the Covid crisis first broke. In three days, the oil price rose by 10 per cent a barrel, US long yields widened more than 15 bp and out-of-favour sectors rallied more than 10 per cent (banks and oil +18 per cent, insurance and leisure +12 per cent) leaving 2020's star performers trailing in their wake (online retail, pharma, food retail, semis). Some stocks went through the roof: in commercial property (Klépierre +43.5 per cent), in oil (Repsol +33 per cent), in banking (Banco Santander +31.5 per cent) and in aerospace (Airbus +24 per cent).
We have seen bounces by out-of-favour stocks in the past. Why is today's situation any different? Can the rebound last?
With vaccines on the horizon, the prospect of a synchronised global economic recovery in 2021 looks much more credible. Investors may therefore continue reweighting towards marked-down companies over coming months.
Investors’ positioning, both between and within sectors, shows expectations are deeply polarised, giving rise to historically high differences in valuation. Global investors are currently uninterested in Europe, which they see as a complicated low-growth market left behind by the digital transition. They have also neglected sectors undergoing structural transition (finance, energy, telephony, media, etc.) concentrating instead on those rare stocks that can offer both growth and visibility. Such stocks now have little appeal. P/E multiples on Europe's 10 per cent most expensive stocks are close to 40x, near double their 20-year average of 23x and four times that of the cheapest 10 per cent.
The scale and strength of the bounce we have seen reflects this highly consensual positioning favouring growth and quality plays. The rebalancing of recent days has probably only mildly corrected this situation. However, investors can expect more reassuring newsflow on the health and economic fronts. Close to a dozen vaccines and an estimated 11 billion doses will become available to health systems over the next 12 months: enough to vaccinate three-quarters of the world's human beings. Unprecedented stimulus packages from the world's monetary and fiscal authorities will finally bear fruit.
Expectations of a sharp bounceback in earnings next year (consensus reckons around +38 per cent), after the 33 per cent squeeze in 2020, look a lot more credible if the health situation gets back to near-normal. Cyclicals are growing earnings fastest, often at two or three times the rate of quality and growth companies. Why pay four times the P/E multiple for a company that might only offer weaker earnings growth for several quarters to come?
True, cheap (“value”) stocks were underperforming even before the Covid crisis and its economic consequences. They also have to deal with structural factors such as unusually low interest rates and the impact of digital transition on Western economic and environmental models. That said, we think such effects could be outweighed, at least in the next few months, by the return of economic and earnings growth. Central bankers seem reluctant to move policy rates much further. Likewise, we are seeing strong reactions from companies threatened by the transformation of their economic model (consolidation, restructuring, repositioning). Public policy and regulators too are responding to concerns about the natural monopolies that are bidding to replace them.
Europe's equity markets are back to just 5 per cent below their year-start level. Can they go further and what sectors will drive such a rise?
The performance of stock markets in 2020 worried investors who saw too great a disconnect with the realities of the economy. This paradox was most evident in the USA where the leading index put on nearly 13 per cent in dollar terms (S&P 500 performance, net dividends reinvested at 13 November) compared to a near 6 per cent drop in European markets in euros. But the latter figure masks huge variations, depending on whether, for instance, you are in the oil sector (down 40 per cent this year) or semi-conductors (up 26 per cent).
For us, Europe’s equity markets still have plenty of upside in the next twelve months. Short term, markets will have to digest the 15 per cent rally since end-October. Looking further ahead, the feeble yields on offer in other asset classes, likely pick-up in the economy and profits, and valuation multiples in line with historical averages suggest the market could generate around ten percentage points of upside by next summer
Driving the rally will be first and foremost the sectors that stand to gain most from the looming recovery, basically cyclicals. We may also see nice gains by some heavily discounted stocks. The relaxation of economic, health and political risk premiums coupled with the prospect of fast-growing earnings in 2021 in some neglected sectors (finance, energy, leisure, media, telephony) should be enough to sustain the process of normalisation we have seen over recent days. Also, we need to keep some exposure to stocks or sectors in the throes of restructuring/consolidation processes, which are ultimately intended to improve their structural profitability. With the market awash in cash and economic prospects looking up, such deals have every chance of success. Finally, while keeping a close eye on value, we continue to favour stocks that are seriously committed to improving the sustainability of their economic model.
How has HSBC GIF Euroland Equity done since the Pfizer announcement?
The fund's approach focuses on discounted stocks. This natural value bias cost it dear in 2020. By the end of October the value theme was underperforming the wider market by nearly 8 per cent.
Since the start of November, though, performances have been boosted by Pfizer’s announcement and a resurgence in risk appetite. At close of trading on 13 November 2020, the fund had gained 17.9 per cent in November compared to around 14.5 per cent for the market. The biggest contributors were our overweights to banking (+29.6 per cent in November), insurance (+22.8 per cent), oil (+25.5 per cent) and capital equipment (+18.1 per cent) and low exposure to retail, cosmetics, luxury and semi-conductors. Stock picking accounted for two-thirds of the outperformance and contributed positively in all sectors except auto (Michelin), consumer durables (Seb) and transportation (Deutsche Post). Note, though, that despite lagging in November all three of these stocks are beating the market YTD.
Getting specific, our positions in Axa (performance of +33 per cent in November), Elis (+35 per cent), Thales (+34 per cent), Crédit Agricole (+27 per cent), Santander (+39 per cent), ING (+27 per cent), Erste (+27 per cent), Repsol (+36 per cent), Allianz (+26 per cent), Societe Generale (+34 per cent) and Unicredit (+27 per cent) were the month's top contributors to relative performance.
|Benchmark2||MSCI EMU (NR)|
|Capitalisation||Biased to large-cap stocks:
EUR 1 billion minimum (at purchase)
|Style||“Relative Value” bias|
|Individual stocks holdings||5 % maximum|
|Average annual turnover||< 30 %|
|Regional exposure||Mainly 10 developed Eurozone countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain)|
|Sector exposure||Tobacco & armament are excluded
No sector constraints yet impose a minimum of 15 industry groups to be held at all times (out of 24 GICS industry groups (Global Industry Classification Standard)
|Synthetic Risk and Reward Indicator (SRRI)3||
Do not run any unnecessary risk. Read the Key Investor Information Document
|Swing price and Gates4||Yes|
|Cash weighting||0-5 %|
- Characteristics and weightings are for information only, are not guaranteed and are subject to change over time, and without prior notice, taking into account any changes in markets. The above mentioned target/limits/objectives is/are to be considered on the recommended minimum investment period and do not constitute a commitment from HSBC Global Asset Management; there can be no assurance that the strategy of the fund will achieve this objective
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SRRI = 6. Do not run any unnecessary risk. Read the Key Investor Information Document. Source : KIID dated May 2020.
Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain for making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided as an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively 'the MSCI Parties') expressly disclaims all warranties((including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information.
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HSBC Global Asset Management (France) - 421 345 489 RCS Nanterre. S.A au capital de 8.050.320 euros. Société de Gestion de Portefeuille agréée par l'Autorité des Marchés Financiers (n° GP99026). Adresse postale : 75419 Paris cedex 08. Adresse d'accueil : Immeuble Coeur Défense | 110, esplanade du Général de Gaulle - La Défense 4 (France). www.assetmanagement.hsbc.com/fr Copyright@2020. Tous droits réservés © HSBC Global Asset Management (France)
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