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Yves Ceelen, Head of Institutional Portfolio Management, explains in this interview his view on equity markets and the key role of active asset management in the current environment.
After a very good start of the year what kind of valuations equities offer?
Equities have had an amazing run so far this year, coming from oversold levels at the end of December. However, fundamentals and EPS expectations have deteriorated further, leaving this rally entirely hinged on a re-rating of valuations. It seems equities are already discounting the positive repercussions of an easier Fed and China stimulus, along with positive news flow from the US-China trade front. This means there is scope for negative surprises again if growth does not reaccelerate as expected.
In the first two months of the year there was a noticeable and widespread downgrading in consensus earnings forecasts, do you expect this to keep going on? Do you think investors should worry?
Earnings expectations are typically set too high at the start of a new year. This year, downgrades of earnings forecasts came quickly and were logical, given that consensus failed to grasp the extent of the global slowdown. This was especially clear when comparing ex-commodity 2018 & 2019 EPS growth expectations. While expectations have certainly adjusted somewhat, H2 expectations of certain cyclical sectors still seem rather ambitious and require a reacceleration in global growth. The same goes for 2020.
Do you have in mind a return forecast for equities in 2019?
Equities have already priced favorable conditions for the coming months. More will have to be done on the fiscal and monetary front to keep this rally going. It might well be that the rest of the year will be flat to mildly down.
2019 P/E across regions
Source: Factset, Bloomberg, DPAM
Do you think the current environment is more favourable to alpha/stock picking strategies than benchmark-based ones?
Active management should prevail in European equities to avoid value traps, especially in oversized and overregulated sectors such as financials, utilities and telecommunication services. Within corporate bonds, active management is especially important to identify healthy businesses and balance sheets that can weather an inevitable growth slowdown sooner or later.
What kind of stocks/companies would be the right choice in the current environment?
Focus on quality companies and under-researched mid-caps after careful fundamental analysis. Within defensives, the fundamentals of staples and retail look uninspiring.
Finally, what do you think is the greatest risk in 2019?
A pickup in US inflation to the extent that the Fed will feel forced to tighten monetary policy. It would lead to a tightening of financial conditions and the US dollar might see another rally. This in turn would drag down global growth and risky asset classes like equities and low-rated bonds.