We are updating our large cap convictions list. At the start of 2020, marked by a widespread easing of major risks (macroeconomic, global trade, political), we are betting on the market questioning the record valuation of growth. We are therefore focusing our stock selection slightly more on value. Additions to our list: Accor, Atos, EDP, JC Decaux, Nexi, Subsea 7 and Unicredit. Withdrawals from our list: Air France, AstraZeneca, Cap Gemini, Carrefour, Engie, Icade, Michelin, Rolls Royce.
At the start of 2020, a slightly more value-focused bet despite everything
Whilst the start of 2019 was marked by investor concerns, the subsequent market performances were spectacular. In short, fears of a recession in the US failed to materialise, largely due to the Fed’s capitulation. In Europe, the German industrial recession did not erode global activity, once again largely thanks to the abandoning of the expected monetary normalisation, although this was not the only factor. In both the US and Europe, the momentum of the labour market and consumer spending have underpinned robust consumption. Lastly, while the Chinese slowdown is confirmed, it is no longer of real concern following the resumption of a "constructive" trade dialogue with the US.
In this context, the baseline scenario of ODDO BHF’s economists is that of a continued easing of tensions on all fronts in 2020. Whilst the global economy continues to decelerate (2.9% in volume terms vs 3.1% in 2019), this will resemble a "soft landing" during which the eurozone will fare well in relative terms. According to our economists Bruno Cavalier and Fabien Bossy, Europe will probably be the only continent to experience growth (albeit marginal) in its level of activity in 2020e vs 2019 (+0.1% GDP to 1.3% vs 1.2%), whilst the other regions seem set to remain on a downtrend.
This scenario appears to be taking shape at this stage. The most recently published European manufacturing PMIs (24 January) are picking up, the risk of early parliamentary elections (which would have a strong probability of bringing Matteo Salvini back to power) is receding following the victory of the democratic party in the emblematic region of Emilia Romagna, and Brexit is progressing without drama. In the US, growth remains robust and the central bank is unanimously committed to pursuing accommodative policies. Finally, the budgetary floodgates could open to finance the energy transition in the face of the climate emergency.
Consequently, only an unforeseeable major event such as a "black swan" could derail the prevailing optimism. The viral epidemic detected in China has several disruptive characteristics (major impact on business activity, exchange of goods and commodities, initial valuation difficulties) that could, in the short term, negatively affect risk appetite and market trajectory, pushing profit taking after a sharp rise in valuations. That said, even though the WHO declared a global health emergency last night, mortality remains low compared to SARS (and seasonal flu) and contagion outside China relatively limited. Thus, we believe that this episode, without any major deterioration in the coming weeks, should result, as with SARS, in a marked rebound in the markets following its conclusion. There are ways to exploit this outlook.
Thus, the return of better visibility could lead investors to question the valuation premium attributed to growth stocks. Our selection therefore takes on an opportunistic "value" colouring, without straying too far from traditional quality criteria (free cash flow, balance sheet quality).
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