This post is also available in: 
Français
Sector rotations sanctioned
energy stocks mirroring the pull back in crude prices and a recovering dollar. Healthcare stocks corrected after
the State of the Union and the Amazon, Berkshire and JP Morgan drug platform initiative.
Hedge funds gave back some of the recent gains. CTAs and Global Macro underperformed, dragged by their
long in equities and energy. Conversely, Event Driven funds and L/S Neutral funds were resilient. Hard-catalyst
stocks were reasonably spared while equity rotations were rather sector than factor driven.
This week we review the environment for European stock-pickers. Opportunities seem substantial given the wide
set of stocks with upside from their operational leverage and firming corporate activity. Multiple themes are
available, including, the French reforms, the Greek & Italian banks consolidation, a capex revival etc.
Like in other regions, correlations collapsed, suggesting unrelated stock movers. As a result, portfolios bear less
correlation risk. Moreover, ample liquidity and economic conditions allow investors to focus on companies. Stock
discrimination is emerging, evidenced by returns after earning releases, increasingly driven by company
specifics. Stock dispersion remains moderate but is higher than what implies the low volatility level.
The potential for alpha generation seems strong, but has yet to unleash when political risk have eased. The
economic recovery, the reforms led in France, a more Europhile German government all increase the odds for
reforms in Eurozone.
Their nature has yet to be determined with two main opposing lines represented by the
Northern and the Southern members. The current political dynamic suggests that more spending and more fiscal
integration have better odds than reforms toward greater financial risk-sharing. The key risk lies with the Italian
elections. Prospects of an Italexit seem remote but an adverse electoral result could break the dynamic in
Eurozone reforms. It could discourage foreign investors and question the recovery sustainability. Save a major
Italian surprise, prospects for European stock pickers will improve in our view.
Add Comment