Europe revisited

Europe revisited

Counterpoint - July 2024

A bit like the unpredictable weather we’ve had over the past few weeks, politics has been a rollercoaster. As expected, the UK election delivered a Labour win. While there might be tax and broader fiscal implications at the individual level, the outcome wasn’t unexpected, which is why it hasn’t moved markets that much. At this stage, we’re neutral UK equities and, in our sterling portfolios, we’re increasing our gilt exposure. Conversely, the French election created a risk of a right- or left-wing absolute majority implementing unorthodox policies , including significant fiscal spending (though not likely going as far as arguing for exiting the euro), which could have impacted European and French market sentiment – as we saw over the past few weeks. This risk hasn’t materialised, presenting a buying opportunity for European stocks and bonds.

One lesson for investors trying to position for political outcomes is: don’t. They’re very hard to predict, and it’s even harder to predict how the market would react. The investments we make are driven by a thorough research of the ‘fundamentals’ (such as valuation) and ‘technicals’ (such as momentum) of an asset class. Furthermore, we make these decisions in the context of our globally diversified portfolio, which we believe minimises the impact of local events, including (geo)politics. A wobble in one part of the portfolio can be offset by a gain somewhere else. Of course, this doesn’t mean that one shouldn’t look at election outcomes. I and the Investment Committee were already preparing to increase our exposure to European equities, as we considered (and still do) the fundamental case to be compelling. We paused that idea ahead of the French election, mindful of the risks. With that risk now passed, we decided to go ahead.

Daniele Antonucci

Daniele Antonucci

Daniele Antonucci is a managing director, co-head of investment and chief investment officer at Quintet Private Bank. Based in Luxembourg, he jointly chairs the investment committee, owning decision-making and performance outcomes. As head of research, Daniele oversees the investment strategy feeding into portfolios and the teams of specialists across asset classes and solutions, ranging from macro, fixed income and equities to funds, alternatives, and structured products and derivatives. He leads the network of chief strategists, communicating the house view on the economy and markets to financial advisors, clients and the media.

Prior to joining Quintet in 2020 as chief economist and macro strategist, Daniele served as chief euro area economist at Morgan Stanley in London. Daniele completed the High Performance Leadership Programme at Saïd Business School, University of Oxford, holds a master’s degree in economics from Duke University and graduated from the Sapienza University of Rome. Featured in The Economist and Financial Times and often quoted in the generalist press, he’s a published author in finance and economics journals and investment magazines, a frequent speaker on CNBC and Bloomberg TV, and an ECB Shadow Council member.

Increasing exposure to European equities 

In our Mid-Year Outlook we argued that we shouldn’t rip everything up and start again with a new view just because it’s the middle of the year. Instead, we are adapting to today’s markets and attempting to anticipate what may come next. Give or take, we think our baseline scenario of a US ‘soft landing’ (slower but positive growth), a gentle acceleration in the eurozone/UK and some stabilisation in China is playing out.

Inflation in the eurozone has been steadily decreasing since its peak in October 2022. Now, it’s nearing the European Central Bank’s (ECB) 2% target and, last month, the central bank cut rates for the first time in five years, joining the Swiss National Bank and Sweden’s Riksbank. We think the ECB is likely to cut again in September. We believe this removes (at least partly) a major headwind for economic growth and equities. In the absence of a recession, history shows that interest rate cuts could boost equities. So, given our view that there’s a higher probability of a recovery than a recession in Europe, adding to European equities is a logical next step. Higher interest rates have also weighed on consumption and investment, so lowering rates is likely to alleviate these concerns. We expect one or two more rate cuts from the ECB this year, which could further benefit European equities.

While there could be long-term effects, we doubt that the elections in Europe will have a material impact on European equities, taking a 6–12-month view. A hung parliament in France limits the room for unorthodox policies, as the need to form coalitions also means seeking compromises. In Italy, where a right-wing coalition has been in charge since October 2022, the fact that the less mainstream views on euro membership have been abandoned mitigated any market reaction, with Italian equities performing in line with, or better than, their peer group.

Taking profits on global small-cap equities

While the European equity investment means that we’re now overweight European equities (we own more compared to our long-term strategic asset allocation), we want to keep our broad equity exposure the same. Therefore, we need to fund this purchase by selling some equities. With the outlook changing in the US (positive but slowing growth, fewer and later rate cuts) and Europe (positive and accelerating growth, more and earlier rate cuts), we’ve decided to lock in the profits on our global small-cap position vs bonds and use these to fund our European equity investment.

This means that, while valuations are attractive, we no longer think small caps will outperform large caps in the near term. Rather, we think large caps will lead the way, which is why we position our flagship portfolios with mostly large-cap companies. We do this both via the investment funds we select from across the industry, in line with the ‘open architecture’ principle of our investment philosophy, and through our single-line stock portfolio, which includes both European and US companies (which, across funds and single lines, represent the bulk of our equity exposure).

Adding more European bonds, reducing US Treasuries

In fixed income, we’re keeping our overweight exposure to EUR investment-grade (IG) bonds. This is partly because we like the yield these bonds offer, but also because the ECB cutting rates in an improving economy could be supportive. But, for quite some time, we’ve been underweight European government bonds. It wasn’t clear when the ECB was going to cut interest rates and, if one really wanted to increase fixed-income exposure, EUR IG bonds offered more compelling yields. 

While we’re keeping our overweight EUR IG bonds position, we’re now entering an overweight position on short-dated European government bonds, too. This is because short-dated bonds are most sensitive to central bank rate changes. So, with the ECB now cutting rates, one-to-three-year European government bonds could benefit, as prices rise when yields fall. With the Fed not cutting rates yet and perhaps underdelivering compared to market expectations of a couple of cuts this year, we’re financing the short-dated European government bond purchase by selling some of our US Treasuries.

Protecting portfolios against volatility

There are still lingering (geo)political risks, not least from any volatility associated with the US election in November. Earlier this year we bought an ‘insurance’ instrument (technically a warrant) in our flagship portfolios and those where client knowledge and experience, and regulations, permit. This was to partially protect portfolios from such volatility. This is an instrument that appreciates in value if there is an equity drawdown, protecting portfolios, for the part ‘insured’, against unexpected events.

Our European insurance instrument has worked well, cushioning the downside in the recent periods of volatility. But, following the rise in US equity markets this year, our US insurance instrument would only cushion the downside after a significant fall. Therefore, we’ve decided to sell our current US ‘insurance’ position and buy it again at today’s levels (known as ‘restriking’). This means the protection would kick in earlier if a drawdown were to occur.

If you want to discuss your portfolio positioning, your Client Advisor will be happy to help. 

We take time to listen
Thank you for reading our monthly update.
Please contact us if you have any questions, remarks or suggestions regarding this update.

Take a look at our other publications below:

Always there for you
At Quintet, we pride ourselves on being small enough to really get to know you, yet big enough to give you easy access to the best the world of finance has to offer. Whatever your needs, we will provide objective insights, advice, products and services tailored to your personal goals. And with offices in 50 European cities we are always there for you wherever you are. Why not come and talk with us today?

This document is designed as marketing material. This document has been composed by Quintet Private Bank (Europe) S.A., a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg, registered with the Luxembourg trade and company register under number B 6.395 and having its registered office at 43, Boulevard Royal, L-2449 Luxembourg (“Quintet”). Quintet is supervised by the CSSF (Commission de Surveillance du Secteur Financier) and the ECB (European Central Bank).

This document is for information purposes only, does not constitute individual (investment) advice and investment decisions must not be based merely on this document.

Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment) decisions based on this information are at your own expense and at your own risk. It is up to you to (have) assess(ed) whether the product or service is suitable for your situation. Quintet and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document. All copyrights and trademarks regarding this document are held by Quintet, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Quintet. See the privacy notice on our website for how your personal data is used (

The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document.

Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Any projections and forecasts are based on a certain number of suppositions and assumptions concerning the current and future market conditions and there is no guarantee that the expected result will ultimately be achieved. Currency fluctuations may influence your returns. 

The information included is subject to change and Quintet has no obligation after the date of publication of the text to update or inform the information accordingly.

Copyright © Quintet Private Bank (Europe) S.A. 2024. All rights reserved. Privacy Statement

Contact us