2017 started off with a bang for European equity markets, closing off the first six months 7% higher with the S&P 500 beating the European index once again, coming in above the 9% return.

Despite the positive performance, we expect equities to continue gaining ground in the second half of the year.

In Europe, the consumption-led recovery has continued to strengthen. Reason being unemployment is falling, bank credit expansion is accelerating steadily and the ECB continues to provide support through QE and negative rates.

In the US, it is true that President Trump did not start delivering on his election promises. However, the economy continued to go strong and companies reported good results.

In the second half of the year, we expect the market to continue to benefit from these factors, however, we expect specific sectors to benefit rather than the market as a whole.

In H217 we remain overweight Europe and neutral on the US. 3 sectors I particularly like in Europe are as follows:

Banks and insurance companies - Reason being we expect the ECB to start hinting on the reduction of the bond buying program. In fact this is being anticipated in the rally we are seeing in the EURUSD.

The auto sector - The European auto industry is trading 20% below its 10-year average valuation at 8x 2017 estimated earnings.

The airline sector - We are not convinced on whether we will see a rebound in the oil price anytime soon. Having said that, the airline industry should continue to benefit from a lower oil price and improved economic growth forecasts.

Moving on to my top 5 equity picks for H217. The following are the stocks I expect will outperform the markets and continue generating alpha in clients’ portfolio in the second half of the year.

Societe Generale (ticker: GLE, Price Target €54)

GLE is trading on a P/E of 11.4x. Given our positive outlook on the European economy and potential for interest rate hikes sooner rather than later, we believe this company should be trading on a P/E closer to 12x. Based on 2017 forecasted earnings of €4.45, we are expecting a 12-month price target of €54.

FY17 dividend unlikely to decrease: SG management reiterated that dividend is unlikely to decrease, and the policy remains unchanged with the group aiming to payout 50% of earnings and grow DPS progressively. The shares are trading on a gross dividend yield of 4.50%.

Muenchener Rueckversicherungs-Gesellschaft AG (MunichRe) (ticker: MUV2, Price Target €200)

We added Munich Re to our equity list with a price target of €200. This is in line with our strategy of investing in companies that will benefit in a rising interest rate scenario. The shares are trading on a 2018E earning yield of 10% which is very attractive compared to other industries trading on high

valuations. The shares are also trading on an attractive indicative gross dividend yield of 5% which is very attractive in today’s markets.

Ryanair (ticker: RYA, Price Target €20)

Ryanair remains the best-in-class airline in terms of unit costs, profitability, cash generation and cash return to shareholders. With consensus earnings per share expected to come in at €1.22 in 2018 and using a PE multiple of 16x, we expect the price of Ryanair shares to move towards the €20 level. This means a potential 7% capital upside. I would also like to stress that an EPS of €1.22 conservative considering the outlook of this company. If you look at what other analysts are saying (eg Barclays) they are forecasting earnings of €1.32/ share which would result in a Price Target of €21.

Renault SA (ticker: RNO, Price Target €95)

We added Renault to the equity list with a price target of €95. Renault 2022 targets likely to be reached two years earlier. Renault shares fell 9% on the 15th of March on report by the French Media the Renault misled customers on emissions approval tests. Renault continues to deny that it has breached any regulations and says that its cars are not equipped with cheating software.

Renault is trading at 6x earnings, Renault would typically trade between 8x and 9x earnings had these allegations been removed.

Foot Locker (ticker: FL, Price Target $75)

Shares of Foot Locker have fallen after analysts started worrying that the Company wouldn’t be able to reach its goals for 2017. I believe this negativity is more than being priced in and the shares are now trading at attractive levels. The shares are trading on a P/E of 11x compared to their historical average of 15x. Based on 2018E earnings of $5.17 and assuming that the Company will get back on track, we expect the shares to trade at $75 per share.


This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.


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