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.

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

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