European markets lagged their US counterparts in June, especially the "growth" and technology-heavy NASDAQ, as fears of peak purchasing managers' index (PMI) data, peak money-creation and peak inflationary-impulse stalled the so-called ‘reflation trade’. Even the mid-month concession by the US Federal Reserve (Fed), that inflation is indeed running ahead of expectations and an interest rate increase may well be warranted sooner than previously communicated, could only briefly arrest the decline of the US 10-year Treasury yield - an instrument which has assumed bellwether status with respect to market shape (such as growth versus value). It may well be the case - at least for the second half of the year while the market awaits greater clarity on COVID-19 vaccine success, the impact of the Delta variant and the strength of consumer appetite beyond COVID - that the easy wins of the "reflation trade" have been made. But, with authorities in most major regions signalling a strongly pro-fiscal stance, household finances robust, creeping wage inflation and the likelihood of medium-term commodity strength (such as metals needed for electrification), it would be premature to argue that the market's brief flirtation with cyclicals and other assorted "value" is at an end and that an inevitable return to the pre-COVID, post-financial crisis paradigm of low rates, fiscal austerity, low inflation and clear growth/technology leadership is looming. As such, we think stock or sector-specific idiosyncrasy is likely to play a greater role in markets.
Our activity during June reflects our view above. We reduced our semiconductor exposure as hints of double ordering – usually indicating that a peak in the inventory cycle is approaching – started to emerge. We initiated a position in Danone, a long-time laggard among consumer staples, as a highly regarded external CEO appointment was made with a remit to turn the business around after years of strategic confusion. We boosted our exposure to "big pharma" following a period of chronic underperformance.
References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.