Anthony Bailly
Head of European Equity
After a month of pressure in May, European indices rebounded strongly, with the Eurostoxx reinvested dividends up 3.8% in June(1). The index's performance was driven by cyclical sectors, particularly non-food retailing, banking and automotive, which emerged as the best performing sectors over the month. This contributed to a 4.5% rebound in the value style, outperforming the Euro index by 0.7% over the month and the growth style by 1.0%(2), bringing the outperformance of growth over value to 10.7% since the start of the year. The main reason for this rebound in value is the resilience of macroeconomic data in the United States, which has removed the spectre of a short-term recession and restored credibility to the "soft landing" scenario.
However, this slight rebound leaves the valuation of the value style in Europe close to its historic lows at 8.7x P/E, compared with 12.5x for the MSCI Europe (close to its historic median). This contrasts with the growth style, whose valuation at 21.1x is a little closer to its high points. Some value sectors seem to be incorporating a scenario of a marked slowdown in the economy, notably the automotive (6.0x) and banking (6.4x) sectors, which have been below the 10th valuation percentile for over 30 years. Conversely, consumer goods (23.9x) and technology (21.2x) are trading at very high valuations(3), despite the paradigm shift in interest rates.
Furthermore, the dynamics of valuation levels do not reflect those of EPS revisions: earnings expectations for 2023 in the banking sector have been revised by 16.6% since the beginning of the year, and those for the automotive sector by more than 10%, while those for the technology sector have been revised upwards by 1% and those for consumer goods revised downwards by almost -4%(4).
In this more value-friendly environment in June, R-co Conviction Equity Value Euro(5) gained 4.6%(6), outperforming its benchmark by 0.7%, in line with the value style over the month. Most of the outperformance was due to favourable stock selection in the energy, technology, healthcare and banking sectors. We are maintaining a relatively cautious bias in the portfolio in view of the persistent macroeconomic uncertainties: leading indicators continue to deteriorate, particularly in Europe and China, and central bankers' rhetoric suggests that interest rates will continue to rise. The impact of this restrictive monetary policy is likely to continue to weigh on the real economy over the coming months. Against this backdrop, we have maintained a cash position in the portfolio, which stood at 6.3% at the end of June. The weighting of the defensive/liquidity pillar of the portfolio thus remains close to its historical highs at 35%.
We did, however, make a few opportunistic moves: in particular, we increased our position in Société Générale(27). The risks of tighter regulatory constraints in the European banking sector are receding, and this stock, which had been particularly hard hit by fears that the crisis affecting US regional banks would spread to Europe, now offers an interesting opportunity. The arrival of the new management team, with its constructive approach and credible objectives, should enable the stock to recover.
More generally, we continue to see an opportunity for Value in both the short and long term. In the short term, given the continuation of hawkish monetary policies, the style should, as it demonstrated in 2022, offer good resilience whatever the market configuration. The recent marked underperformance relative to growth has again stretched valuation spreads. We do not believe that the marked outperformance of the growth style since the start of the year is sustainable given the level of interest rates. This is due to the very good performance of the technology sector, driven by developments in AI, and the luxury goods sector, which investors see as immune to the economic slowdown. In the long term, with inflation likely to remain structurally above central bank targets, the value style will retain its relative attractiveness. All the more so as its discount to growth has still not disappeared, despite the threefold paradigm shift underway (inflation, monetary policy and interest rates).
