Crédit Mutuel Asset Management: April – Equity Convictions

By Caroline LAMY, Head of Equities, Crédit Mutuel Asset Management
Crédit Mutuel Asset Management is an asset management company of Groupe La Française, the holding company of the asset management business line of Crédit Mutuel Alliance Fédérale.

Two questions arose last quarter.

- The first was “Is the market overly optimistic?” We indeed observed a Fear of Missing Out (FOMO) trend, where investors remained exposed despite mixed signals.
- The second was “How to navigate in an environment where rising oil prices are weighing on consumers and industrial companies while the massive rollout of AI is creating opportunities in data centers, semiconductors and electrification?

Against this backdrop, European equity markets experienced a first quarter that played out in three distinct phases.

1. Euphoria. The Euro Stoxx 50 rose by nearly 7% by end of February, driven by AI and electrification themes. ASML and Siemens Energy gained nearly 40% in less than two months. However, performance dispersion was already significant. For example, SAP lost nearly 20% and LVMH more than 14%.

2. Shock. The outbreak of the Iranian conflict triggered a sharp correction of nearly 10%. However, oil-related stocks quickly rebounded on the back of rising crude oil prices, due to the blockade of the Strait of Hormuz. However, this only lasted a month.

3. Recovery. The ceasefire announcement brought pre-conflict themes back to center stage, namely AI and European sovereignty, and the market recovered almost to its pre-conflict levels.

What is striking is the market’s ability to look beyond the conflict and focus on what lies ahead. Earnings revisions increased, led by oil companies and financials, offsetting pressure on consumer stocks. These expectations created room for further market upside. In the United States, the underperformance of the Magnificent 7 at the start of the year, benefitted the Russell 2000. Announcements from Anthropic and OpenAI triggered waves of selling in software and IT services stocks. The rotation was violent.

Earnings revisions are creating upside potential because valuations are becoming more attractive again, even though the market has probably underestimated the lasting impact of the Hormuz blockade.

Another factor to monitor is midterm elections in the United States. Which sectors should be favored as we approach the November elections? Cyclicals, AI winners and the defense sector are, in principle, all supported by AI investment projections.

Outlook

At the start of this quarter, we remain cautiously optimistic and selective. Structural trends, i.e. data centers, electrification and sovereignty, are all durable long-term themes.

We favor industrial cyclicals, financials, semiconductors, as well as utilities and European mid-cap equities in general, given the stabilizing economic environment.

In conclusion, the equity market has already priced in the end of the Strait of Hormuz blockade. We are reasonably confident about the coming months. The earnings season should confirm profit growth expectations. Close attention should be paid to a company’s ability to absorb cost inflation. Structural trends such as AI, European investment and sovereignty should continue to support the long-term trajectory. We remain attentive to any shift in interest rates and geopolitics, with a particular focus on inflation.