Exposure rates of the Dorval Asset Management Range – 12th March 2021

The economic outlook is brightening in Europe despite the setbacks suffered in the vaccination campaign.

However, the ECB is keen to prevent real rates taking an excessive upturn as it seeks to prop up growth and inflation.


The European manufacturing industry has been buoyed by the world recovery for the past several months, but showings for the services sector are still determined by the business restrictions resulting from the pandemic. Unfortunately, these restrictions are set to last longer in Europe than in the United States. However, announcements are being made – country after country – on the timeframe for reopening the economy, while high-frequency data already suggest that movement is picking up in Europe again. If this trend is indeed borne out, it will be a good sign for the business climate in the services industry (cf. chart 1).


Google mobility data indicate that a reacceleration in services is in the making in Europe

Services PMI, euro area / Model based on Google mobility data


Despite this potential for good news, Europe’s lag compared with the US and the UK has been acknowledged by the ECB, which intends to ward off any deterioration in financial conditions by stepping up its asset purchases over a period of three months. The central bank seems to want to simultaneously avoid a significant surge in real rates and drive a renewal in optimism from both investors and economic agents overall. It seems to have succeeded in its goal so far, as real rates have dipped again and inflation projections continue to increase, although they still remain far short of the 2% strategic target (cf. chart 2).


The ECB has pushed down real rates and driven inflation projections

10-year OAT / 10-year inflation-linked OAT in euro area (=real rates) / 10-year projected inflation


In addition to the vaccination program, reflation in Europe will also require pledges from the region’s governments that they will keep on shoring up economic activity as the economy opens again – and afterwards. In this respect, the signature of Biden’s $1.9trn relief package along with the tone set by the ECB have put welcome pressure on the euro area, which is traditionally renowned for its fiscal orthodoxy.


On the world markets, expectations for an economic recovery are still in fine fettle, thereby sustaining upward pressure on US long-term yields. This trend offered a pretext for sometimes spectacular sell-offs on highly popular but extremely pricey stocks, such as Tesla, as well as GreenTech stocks. The hot air bubble on high-profile stocks related to the world of the future theme has therefore partly deflated, which is fairly positive news.


In Europe, the cyclicals vs. defensives approach in particular has accelerated over past weeks, but despite the pace of trends, an analysis of valuations has not yet set the alarm bells ringing. Forward P/E for cyclicals remains reasonable (below 15), and the cyclicals vs. defensives valuation ratio is still within past norms (cf. chart 3). An assessment of price to book ratios also points to the same conclusion.


Median forward P/E for cyclicals and defensives
Goldman Sachs European baskets

Defensive stocks / Cyclical stocks / Ratio of cyclicals to defensives


Our portfolios remain overweighted on cyclical themes and themes related to the reopening of economies. Exposure rates for our flexible funds are virtually unchanged.


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