Themes: Technological disruption remains the most important theme and hence idiosyncratic factors are dominating stock and sector performance. Buy European domestic demand plays, focus on non-US defence, global construction and leisure/experiences. The risk is in credit, and we examine plays on that.
Style: We continue with our long-standing overweight of growth (though benchmark in Europe), with a focus on short duration (i.e. high FCF). We remain overweight European small caps. We bring US small caps down to benchmark, and stay underweight UK small caps. Dividend aristocrats look too cheap in Europe.
Sector upgrades to overweight: Auto OEMs, budget airlines, tobacco.
Sector downgrades: Big cap pharma and mining (to benchmark); non-content broadcasters (to underweight). We go into 2018 a small underweight of cyclicals (ex. financials), with cyclicals driven by lead indicators, not bonds.
Key overweights: Technology (software, gaming, cybersecurity, though we reduce our overweight in internet), financials (retail banks in Spain, French composite insurers, GEM-exposed life and P&C), employment agencies, auto components (though reduced), European wireless telecoms, German real estate and healthcare equipment (hearing aids).
Key underweights: Capital goods (China-exposed and growth names), utilities (UK regulated), asset management (retail focused), food producers/HPC, freight forwarders, legacy wireline telecoms, hotels, UK office REITs and UK homebuilders, Continental European retailing and GDSs.