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European equity markets: bounce or real recovery?

HSBC GIF Euroland Equity : Portfolio Manager Interview
16 November 2020
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    Key points

    • Pfizer's vaccine announcement triggered a spectacular turnaround in trends established since the Covid crisis first broke
    • Europe’s equity markets, which had already put on nearly in the 7 per cent first week of November, nearly repeated the feat, rising 5.4 per cent last week
    • With vaccines on the horizon, the prospect of a synchronised global economic recovery in 2021 looks much more credible. Investors may therefore continue reweighting towards marked-down companies over coming months
    • We think European equity markets still have upside in the next twelve months
    • Cyclicals are growing earnings fastest, often at twice or three times the pace of quality and growth stocks
    • Since the start of November 2020, the performance of HSBC GIF Euroland Equity has been boosted by Pfizer's announcement and a resurgence in risk appetite

    European equity markets mounted a big rally at the start of the week. What happened?

    Europe's equity markets were already heading upward since the start of November (MSCI Europe dividends reinvested up 6.9 per cent in euros between 30 October and 6 November) on an unexpectedly strong Q3 earnings season and the likely shape of the next US administration, despite lingering doubts.

    Then, in the week after 6 November 2020 markets near doubled their gains, adding 5.4 per cent. On Monday, Pfizer and BioNTech announced their Covid-19 vaccine had achieved excellent results in the first phase of pre-marketing analysis and could be on the market before New Year.

    The news revived credible hopes of a synchronised recovery by the world's big economies in 2021, hopes that had taken a bashing from the second wave over recent weeks. This triggered a spectacular turnaround in trends established since the Covid crisis first broke. In three days, the oil price rose by 10 per cent a barrel, US long yields widened more than 15 bp and out-of-favour sectors rallied more than 10 per cent (banks and oil +18 per cent, insurance and leisure +12 per cent) leaving 2020's star performers trailing in their wake (online retail, pharma, food retail, semis). Some stocks went through the roof: in commercial property (Klépierre +43.5 per cent), in oil (Repsol +33 per cent), in banking (Banco Santander +31.5 per cent) and in aerospace (Airbus +24 per cent).

    We have seen bounces by out-of-favour stocks in the past. Why is today's situation any different? Can the rebound last?

    With vaccines on the horizon, the prospect of a synchronised global economic recovery in 2021 looks much more credible. Investors may therefore continue reweighting towards marked-down companies over coming months.

    Investors’ positioning, both between and within sectors, shows expectations are deeply polarised, giving rise to historically high differences in valuation. Global investors are currently uninterested in Europe, which they see as a complicated low-growth market left behind by the digital transition. They have also neglected sectors undergoing structural transition (finance, energy, telephony, media, etc.) concentrating instead on those rare stocks that can offer both growth and visibility. Such stocks now have little appeal. P/E multiples on Europe's 10 per cent most expensive stocks are close to 40x, near double their 20-year average of 23x and four times that of the cheapest 10 per cent.

    The scale and strength of the bounce we have seen reflects this highly consensual positioning favouring growth and quality plays. The rebalancing of recent days has probably only mildly corrected this situation. However, investors can expect more reassuring newsflow on the health and economic fronts. Close to a dozen vaccines and an estimated 11 billion doses will become available to health systems over the next 12 months: enough to vaccinate three-quarters of the world's human beings. Unprecedented stimulus packages from the world's monetary and fiscal authorities will finally bear fruit.

    Expectations of a sharp bounceback in earnings next year (consensus reckons around +38 per cent), after the 33 per cent squeeze in 2020, look a lot more credible if the health situation gets back to near-normal. Cyclicals are growing earnings fastest, often at two or three times the rate of quality and growth companies. Why pay four times the P/E multiple for a company that might only offer weaker earnings growth for several quarters to come?

    True, cheap (“value”) stocks were underperforming even before the Covid crisis and its economic consequences. They also have to deal with structural factors such as unusually low interest rates and the impact of digital transition on Western economic and environmental models. That said, we think such effects could be outweighed, at least in the next few months, by the return of economic and earnings growth. Central bankers seem reluctant to move policy rates much further. Likewise, we are seeing strong reactions from companies threatened by the transformation of their economic model (consolidation, restructuring, repositioning). Public policy and regulators too are responding to concerns about the natural monopolies that are bidding to replace them.

    Europe's equity markets are back to just 5 per cent below their year-start level. Can they go further and what sectors will drive such a rise?

    The performance of stock markets in 2020 worried investors who saw too great a disconnect with the realities of the economy. This paradox was most evident in the USA where the leading index put on nearly 13 per cent in dollar terms (S&P 500 performance, net dividends reinvested at 13 November) compared to a near 6 per cent drop in European markets in euros. But the latter figure masks huge variations, depending on whether, for instance, you are in the oil sector (down 40 per cent this year) or semi-conductors (up 26 per cent).

    For us, Europe’s equity markets still have plenty of upside in the next twelve months. Short term, markets will have to digest the 15 per cent rally since end-October. Looking further ahead, the feeble yields on offer in other asset classes, likely pick-up in the economy and profits, and valuation multiples in line with historical averages suggest the market could generate around ten percentage points of upside by next summer

    Driving the rally will be first and foremost the sectors that stand to gain most from the looming recovery, basically cyclicals. We may also see nice gains by some heavily discounted stocks. The relaxation of economic, health and political risk premiums coupled with the prospect of fast-growing earnings in 2021 in some neglected sectors (finance, energy, leisure, media, telephony) should be enough to sustain the process of normalisation we have seen over recent days. Also, we need to keep some exposure to stocks or sectors in the throes of restructuring/consolidation processes, which are ultimately intended to improve their structural profitability. With the market awash in cash and economic prospects looking up, such deals have every chance of success. Finally, while keeping a close eye on value, we continue to favour stocks that are seriously committed to improving the sustainability of their economic model.

    How has HSBC GIF Euroland Equity done since the Pfizer announcement?

    The fund's approach focuses on discounted stocks. This natural value bias cost it dear in 2020. By the end of October the value theme was underperforming the wider market by nearly 8 per cent.

    Since the start of November, though, performances have been boosted by Pfizer’s announcement and a resurgence in risk appetite. At close of trading on 13 November 2020, the fund had gained 17.9 per cent in November compared to around 14.5 per cent for the market. The biggest contributors were our overweights to banking (+29.6 per cent in November), insurance (+22.8 per cent), oil (+25.5 per cent) and capital equipment (+18.1 per cent) and low exposure to retail, cosmetics, luxury and semi-conductors. Stock picking accounted for two-thirds of the outperformance and contributed positively in all sectors except auto (Michelin), consumer durables (Seb) and transportation (Deutsche Post). Note, though, that despite lagging in November all three of these stocks are beating the market YTD.

    Getting specific, our positions in Axa (performance of +33 per cent in November), Elis (+35 per cent), Thales (+34 per cent), Crédit Agricole (+27 per cent), Santander (+39 per cent), ING (+27 per cent), Erste (+27 per cent), Repsol (+36 per cent), Allianz (+26 per cent), Societe Generale (+34 per cent) and Unicredit (+27 per cent) were the month's top contributors to relative performance.

    Fund details1

    Benchmark2   MSCI EMU (NR)
    Capitalisation   Biased to large-cap stocks:
    EUR 1 billion minimum (at purchase)
    Style   “Relative Value” bias
    Typical holdings   ~50
    Individual stocks holdings   5 % maximum
    Tracking error
    ex ante
      3-5 %
    Average annual turnover   < 30 %
    Regional exposure   Mainly 10 developed Eurozone countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain)
    Sector exposure   Tobacco & armament are excluded
    No sector constraints yet impose a minimum of 15 industry groups to be held at all times (out of 24 GICS industry groups (Global Industry Classification Standard)
    Synthetic Risk and Reward Indicator (SRRI)3  

    Do not run any unnecessary risk. Read the Key Investor Information Document


    Swing price and Gates4   Yes
    Cash weighting   0-5 %
    1. Characteristics and weightings are for information only, are not guaranteed and are subject to change over time, and without prior notice, taking into account any changes in markets. The above mentioned target/limits/objectives is/are to be considered on the recommended minimum investment period and do not constitute a commitment from HSBC Global Asset Management; there can be no assurance that the strategy of the fund will achieve this objective
    2. Index given for comparative and illustrative purposes only. The fund has no official benchmark, its performance may differ materially from that of the benchmark
    3. He rating is based on price volatility over the last five years, and is an indicator of absolute risk. Historical data may not be a reliable indication for the future. The value of an investment, and any income from it, may fall as well as rise, and you may not get back the amount you originally invested. The rating is not guaranteed to remain unchanged and the categorisation may shift over time. The lowest rating does not mean a risk-free investment
    4. The fund uses the swing principle calculation method which determines the net asset value of the fund. Swing pricing allows investment funds to pay the daily transaction costs arising from subscription and redemptions by incoming and outgoing investors. The aim of swing pricing is to reduce the dilution effect generated when, for example, major redemptions in a fund force its manager to sell the underlying assets of the fund. These sales of assets generate transaction costs and taxes, also significant, which impact the value of the fund and all its investors.The fund has a redemption threshold (gate), the level at which the manager of an undertaking for collective investment in transferable securities can stagger the redemption of securities instead of proceeding immediately

    Key risks

    The value of an investment in the portfolios and any income from them can go down as well as up and as with any investment you may not receive back the amount originally invested.

    • Capital loss risk: IIt is important to remember that the value of investments and any income from them can go down as well as up and is not guaranteed
    • Discretionary Management: Discretionary management is based on anticipating the evolution of different markets and securities. There is a risk that the fund will not be invested at any time in the most efficient markets and securities
    • Equity risk: Funds that invest in securities listed on a stock exchange or market could be affected by general changes in the stock market. The value of investments can go down as well as up due to equity markets movements

    Important information

    This presentation is distributed by HSBC Global Asset Management and is only intended for professional investors as defined by MIFID. The information contained herein is subject to change without notice. All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful.

    The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management.

    Tax treatment depends on The individual circumstances of each client and may be subject to change in The future.
    Capital is not guaranteed. It is important to remember that the value of investments and any income from them can go down as well as up and is not guaranteed.

    Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document.
    All data from HSBC Global Asset Management unless otherwise specified.
    Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified. The capital is not guaranteed.

    Past performance is no guarantee of future returns. Future returns will depend inter alia on market developments, the fund manager’s skill, the fund’s level risk and management costs and if applicable subscription and redemption costs. The return, the value of money invested in the fund may become negative as a result of price losses and currency fluctuations. There is no guarantee that all of your invested capital can be redeemed. Unless stated otherwise, inflation is not taken into account.

    SRRI = 6.
    Do not run any unnecessary risk. Read the Key Investor Information Document. Source : KIID dated May 2020.

    Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain for making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided as an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively 'the MSCI Parties') expressly disclaims all warranties((including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information.
    Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (
    If you have any doubts about the suitability of this investment, you should contact an independant financial adviser.

    HSBC GIF Euroland Equity is a sub fund of HSBC Global Investment Funds, a Luxemburg domiciled SICAV. Before subscription, investors should refer to Key Investor Document (KIID) of the fund as well as its complete prospectus. For more detailed information on the risks associated with this fund, investors should refer to the complete prospectus of the fund. The shares of HSBC Portfolios have not been and will not be offered for sale or sold in the United States of America, its territories or possessions and all areas subject to its jurisdiction, or to United States Persons. Shares of the Company may not be offered or sold for sale or sold to any "U.S. Person within the meaning of the Articles of Incorporation, i.e. a citizen or resident of the United States of America (the "United States"), a partnership organised or existing under the laws of any state, territory or possession of the United States, or a corporation organised or existing under the laws of the United States or of any state, territory or possession thereof, or any estate or trust, other than an estate or trust the income of which from sources outside the United States is not includible in gross income for purposes of computing United States income tax payable by it.

    HSBC Global Asset Management (France) - 421 345 489 RCS Nanterre.
    Portfolio management company authorised by the French regulatory authority AMF (no. GP99026) with capital of 8.050.320 euros.
    Postal address: 75419 Paris cedex 08
    Offices: Immeuble Coeur Défense - 110 esplanade du Général de Gaulle - La Défense 4 - 92400 Courbevoie - France
    Non contractual document, updated in November 2020.
    Copyright : All rights reserved © HSBC Global Asset Management (France), 2020.
    AMFR2020_EXT_IN_1005. Expires: 11/2021  

    HSBC GIF Euroland Equity est un compartiment de HSBC Global Investment Funds, SICAV de droit Luxembourgeois. Avant toute souscription, les investisseurs doivent se référer au DICI du fonds ainsi qu'à son prospectus. Pour plus de détails sur les risques associés au fonds, les investisseurs doivent se référer au prospectus.

    Il est à noter que les parts d‘Opcvm de HGIF n'ont pas été et ne seront pas commercialisées aux Etats-Unis ni dans aucun autre territoire, possession ou région sous leur juridiction. De même, elles ne pourront être proposées à un ressortissant des Etats-Unis que dans le cas où la transaction ne contrevient pas aux dispositions de la Loi relative aux Valeurs Mobilières (Securities Law).

    HSBC Global Asset Management (France) - 421 345 489 RCS Nanterre. S.A au capital de 8.050.320 euros. Société de Gestion de Portefeuille agréée par l'Autorité des Marchés Financiers (n° GP99026). Adresse postale : 75419 Paris cedex 08. Adresse d'accueil : Immeuble Coeur Défense | 110, esplanade du Général de Gaulle - La Défense 4 (France). Copyright@2020. Tous droits réservés © HSBC Global Asset Management (France)

    AMFR2020_EXT_IN_1005. Expires: 11/2021