Exposure rates of the Dorval Asset Management Range – 26th March 2021

Despite the setbacks on the pandemic front in Europe, investors remain heartened by the current outlook shored up by vaccines and support programs, as well as the economy’s resilience. The fully justified expectations of an economic recovery are already broadly priced in, although perhaps not yet to the extent where a change in strategy is called for.

Despite the setbacks on the pandemic front in Europe, investors remain heartened by the current outlook shored up by vaccines and support programs, as well as the economy’s resilience. The fully justified expectations of an economic recovery are already broadly priced in, although perhaps not yet to the extent where a change in strategy is called for.

 

Business climate and household confidence in the euro are more than merely holding up during the pandemic-related crisis

Manufacturing PMI / Services PMI
Consumer confidence (Eurostat survey)

 

Additionally, European consumer confidence has staged a considerable recovery, as households see the light at the end of the tunnel in the pandemic and also display a comfortable financial situation on the back of savings built up over successive lockdown phases. Meanwhile, the services sector remains hampered, but not as much as expected, and this business is set to post the strongest upturn after lockdown, as we are beginning to see in the UK (cf. chart 2).

 

Powerful recovery in UK services heralds expected European upturn in a few weeks
Services sector PMI (Markit)

Euro area / UK

 

So investors continue to focus on the most cyclical stocks on the European equity markets through it all as they hold out for this outcome. This trend is already very mature, with these stocks often revisiting their 2017 valuation multiples. However, they still harbor scope for outperformance relative to defensive stocks (cf. chart 3) and we thus continue to overweight cyclical stocks in our portfolios.

 

Median price-to-book multiples for cyclical and defensive stocks
Goldman Sachs European baskets (around 45 equally weighted stocks in each basket)

Defensive stocks / Cyclical stocks / Ratio of cyclical to defensive stocks

 

However, the maturity of the outperformance process for European cyclical stocks substantiates our wariness of any binary logic and confirms our feeling that theme diversification strategies should be pursued i.e. either structural (digitalization) or more short-term trends (post-Covid stocks), or both (energy transition, Green Deal).

 

We are also somewhat puzzled by the idea – often bandied about recently – that a value approach should now be followed at all costs, casting off so-called growth stocks. This tactic actually leads to a great deal of misunderstanding, as every investor seems to have a different definition of value. We therefore continue to combine valuation analysis, earnings prospects and risk management in our approach, built on the basis of a main market scenario.

 

 

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