Marc Craquelin


What to make of the decline on European equities markets since 19 September 2014?

by Marc Craquelin, Head of Asset Management


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The market drop is due to the combination of a number of factors:

– The decline in commodities prices, and especially oil  (-23% since 1 June), has been read by the market as an early indicator of a slowdown in global growth.

– In addition, visibility has deteriorated due to geopolitical strains in the Middle East and Ukraine, compounded by uncertainty concerning the impact of the Ebola virus on global trade.

– In Europe, lower than expected economic indicators have prompted investors to undertake arbitrage moves in geographical terms and direct flows into emerging economies.

– Moreover, the ECB has yet to provide a convincing response to the weak level of inflation, thereby reviving fears of a Japanese-like scenario for the euro zone.

– This downgrade to inflation forecasts, reflected by lower inflation swaps, is also returning in the US and is feeding fears of a slowdown in US growth. 

– Finally, the start of a withdrawal from quantitative easing by the FED has prompted investors to take profits on certain stocks prior to Q3 results publications.

However a number of fundamental trends are capable of underpinning the market over the medium term:

– Low prices for commodities and energy resources are beneficial to the purchasing power of European consumers.

– Euro weakness since 1 June, especially relative to the dollar (1.26 at end-September 2014), is a positive factor for Europe and more specifically for exporters companies.

– The ECB remains active, under the leadership of Mario Draghi. We are confident in his ability to implement innovative measures to support growth and fight against deflationary risk.

– Interest rates remain extremely low, thereby encouraging investors to take risks again and enabling companies to reduce their financial expenses.

– Finally, note the healthy state of investment grade bonds, which clearly sets the current drop apart from the 2008 stock markets crisis!

How to act in this context?

> The downtrend on European equities markets is not yet exhausted in our view. In the short term, we favour diversified funds such as ARTY, which meet the expectations of investors looking for controlled volatility via a portfolio that is well balanced between equities and corporate bonds. The fund reacted well to the upheaval over the summer thanks to its flexible strategy.

> We remain convinced that consolidation phases throw up opportunities that should be taken for equities funds. Over the medium term, Echiquier Major is well positioned to make the most of this backdrop. Focused on largeEuropean growth stocks, the fund is naturally exposed to big European exporters who should benefit in coming months from advantageous financing conditions.

Financière de l’Echiquier funds are primarily invested in equities and corporate bonds and present the risk of capital loss. For further information on the risks and costs, please refer to the prospectuses available on simple request from the asset management company or contact your usual representative.

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