Although, economic figures have been improving over the past month with an ISM manufacturing at 53.5, the US equity market declined slightly in June. The main reason can be found in the global market context with the Greek woes at front. The S&P 500 had to give away more than 2% in local currency. Our sector allocation in June, however, contributed positively with an overweight in consumer discretionary and healthcare.

In a context of an improving economic environment, positive earnings revisions and a Federal Reserve that is bound to raise interest rates in the second half of the year, we have a focus on GARP (growth at a reasonable price) and quality names.

  • Sector-wise, we remain positive on Healthcare. The sector is in line with our search for quality growth.
  • We have decreased our exposure towards the energy sector. The sector’s free cash flow is under pressure and balance sheets have weakened (especially in (exploration and production). All sub-sectors are now facing difficulties with several companies announcing too drastic restructuring plans. Even valuation is not really cheap given the prospects, leaving us without arguments to invest in the sector.
  • We remain negative on Utilities (given the rate environment) and Consumer Staples.
  • Industrials continue to be under pressure due to the strong drop in energy prices since last year. The Capex coming from the energy sector represents around 20% of the sector’s revenue.
  • We maintain a neutral on Technology. The sector is suffering from profit warnings (AMD, Microtech, Texas Instruments). Companies’ current PC park is not really old and as there are now significant technologic innovations, they have no reason to invest in additional IT-infrastructure. Also, we believe the handset market is saturated. Nevertheless, some names, such as Microsoft and Cisco could become interesting, if they should decline even further due to negative surprises.

 

Monthly Strategic Insight

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