After moving to a maximum overweight on Eurozone equities at the end of August, Rothschild Asset Management has since taken some profits to reduce the overweight.
Nonetheless, Benjamin Melman, head of asset allocation and sovereign debt for the firm in France, said in a note to clients that he is still positive on equities, and continues to prefer the Eurozone with a focus on domestic cyclicals.
Germany’s industrial companies and exporters remain optimistic and France and Italy are showing signs of emerging from the multi-year crisis, he said.
“It is striking to see how well European, and especially German, surveys have held up in recent months despite slowing emerging country growth, market volatility and the Volkswagen scandal.
“European growth should continue to rise by 1.5-2% in coming quarters and that should help earnings increase at a faster pace in an environment where low interest rates, commodity price falls and stable wage trends will be enough to drive company margins.”
The firm is very selective on European bonds.
“Upbeat prospects on European companies and the ECB’s clear intentions have also led us to favour high yield euro credit.”
Generally, the firm prefers equities to bonds due to emerging markets. Developed market growth is in the beginning stages of recovery, but global growth will be limited by a slowdown in emerging countries, which he said “are grappling with a deflationary environment.
“Emerging countries are, in fact, caught between China’s rebalancing, which is significantly undermining foreign trade patterns in numerous countries, and the risk of private sector deleveraging after the rapid credit accumulation of recent years.”
