European equities

European stocks are selling off, hard, on the back of soaring gas prices (with Europe being heavily reliant on Russian oil and gas imports) and rising uncertainty (economic, financial, military), associated with the Russian invasion of Ukraine.

So far, there has been little by way of negative forecast earnings revisions, but that will come, as many companies are simply not solvent when raw material input prices double or treble, as they have done with coal, and European gas prices (TFF) relative to US prices (Henry Hub).

Now European equities were cheap before this sell-off (see the below price-earnings ratio graph), and economic performance had been pretty good, as indicated by the steady if not spectacular increase in earnings prior to the past fortnight (see EPS chart above).

In our international equity allocations, we are moderately overweight the EU and UK equities. Partly this is on valuation grounds, as per the above, and partly because we think that a 70% allocation to US equities (as per the Vanguard benchmark) is a touch high.

In this case, the “diversifier” trade isn’t exactly working, but, we will continue to stick with it.

At the portfolio level, we are some 600bps UW equities, which should moderate any EU specific impacts on the overall portfolio, and more broadly, moderate any general impact from an increase in risk aversion that causes equities in aggregate to underperform.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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