Our investment process for the Euro-zone is based upon a top down sector allocation and a bottom-up stock selection. Within the Euro-zone, based on the MSCI-sectors, 15 relevant sectors have been identified. Each of these sectors has a dedicated financial analyst which rates the sector (outperform, underperform or neutral) compared to the market. In total there are seven ratings. Within the out- and underperformance there can be a rating from 1 to 3 (-1 to –3). Within the 15 sectors we conduct a bottom-up stock selection.
At this point in time 10 out of 15 sectors are rated neutral. Never before have we been neutral. The reason for this risk averse attitude is based upon the total lack of earnings visibility in different sectors and significant volatility overall. We would certainly believe that when visibility on earnings starts to increase we will also see more pronounced views on the different sectors.
Within the sector views we start with the telecom sector. The telecom sector has been one of the worst performing sectors on a one-year basis. Uncertainty and delays in GPRS/3G coupled with a deteriorating financial situation (UMTS) has led to tumbling telco stocks in Europe. But the combination of very depressed stock prices, margin improvement and the first signs of concentration arising in the sector, is leading us to overweight European telcos.
We’ve recently revised downwards (to neutral) our stance on the banking sector. Yes, we’re aware off the fact that global monetary easing generaly favours the banking sector as a whole, but we think investor sentiment in the short term will be focused on the deterioration of macro-economic conditions in Europe. In such an environment bank earnings usually come under pressure because off a possible increase in bad debt levels. Therefore we prefer diversified financials who have better ‘earnings visibility’! We’re also neutral on the insurance sector but we closely watch the long term decreasing yield curve, and intend to underweight the sector when yields tick up again.
For the tech-related sectors, such as capital goods, consumer durables and telecom-equipment, we remain neutral. The woes in the semiconductor market caused a flood of profit warnings and negative newsflow. This resulted in huge negative earnings revisions for the current year, which we think at present are fully discounted in the stockprices. At current valuations we consider the potential upside far higher than the possible downside. We wait for convincing signs to upgrade, meanwhile we stay neutral.
Recovery of the chemicals depends strongly on the revival of the economy and the evolution of the energy and raw material prices. We look out for buying opportunities after stocks have bottomed out near their support levels. And although a lot of European car stocks offer fundamental value, we remain neutral because overcapacity remains a structural problem. We also have an neutral stance on the food retailing sector. There will be limited consolidation in the sector for the rest of the year because the European retailers have limited financial leeway and need to concentrate their efforts on digesting their recent acquisitions.
We’re neutral on European utilities. Despite being caught up with the EU liberalisation process, utilities are more resilient to slower economic growth due to the inelasticity of demand for their products.
We should avoid pharmaceuticals, food manufacturers and the retailing sector (=luxury goods) because of valuation concerns. Their status of ‘safe-haven’ and negative correlation with technology resulted in soaring stock prices which are difficult to justify.
We remain slightly underweight for the energy sector, even after huge falling oil prices for almost 20%, as we expect a declining earnings momentum during the following quarters and years.
Stefaan Casteleyn is director, asset management at Bank Corluy in Antwerp

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