"In Times Like This, Look For The Nearest Lifeboat And Hang On..."

Authored by Jan-Patrick Barnert and Michael Msika via Bloomberg,

Sure, the number one goal of investors is to make money, but in times like this sometimes all you can do is look for the nearest lifeboat and hang on.

Following yesterday’s slump across Europe, hopes of a year-end rally are now pretty much gone, and with unpredictable political drama in the U.K., France and Italy, it has become nearly impossible for investors to guess what the next day will bring.

The Stoxx Europe 600 index has now erased more than two years of gains and reached an important level both technically, as the market is now in oversold territory, and psychologically, as the benchmark traded around that point during most of 2016.

The visibility is so low that Allianz Global Investors, one of Europe’s biggest asset managers, is saying people should just sell the bounces and trim their exposure to stocks. Any positive surprise aside, markets look set to move sideways and near their lows for the rest of the year with defensive sectors in favor. But as this rotation has been going on for a while this year, protecting capital is becoming more difficult.

“The migration out of the most vulnerable cyclical and lower-quality stocks extends and positional risk is becoming more significant,” Kepler strategist Christopher Potts wrote in a note.

So while sticking to stocks with strong balance sheets and resilient earnings might not make investors immune from losses in a feeble market, some of them have held up well most recently.

Looking at individual sectors, telecoms and utilities have been the best-performing industries on the Stoxx Europe 600 over the past three months, offering superior dividend yields. While European equities trade at 4 percent estimated dividend yield on average, telecoms and utilities trade at 5.6 percent and 5.5 percent respectively. Because, while December is often the time of year when investors can just take stock on their performance, risks remain high in this market.

The uncertainties surrounding Brexit are just mounting. By canceling the Parliament vote to go back to Brussels and try to get some final reassurance regarding the Ireland border, Prime Minister Theresa May has taken a big gamble. There is no date for the final vote and no guarantee she will get anything else from the EU, risking a no-deal crash-out. Looking at the pound trading 1.255 to the dollar and 1.106 to the euro, this is the risk currently being assessed.

As for France, the efforts made by French president Emmanuel Macron to defuse the “Yellow Vest” crisis are likely to weigh hard on the French budget. According to newspaper Les Echos, they come with a price tag of about 11 billion euros, and may leave the country will a budget gap of 3.5 percent of GDP in 2019.

So much for the Italian budget debate.

Potts puts it this way:

“The conversion of the investor community to the bearish interpretation of the investment world is proceeding more rapidly than we appreciated.”

In his view, many market participants are just itching to sell on any decent year-end rally to cut risk just as long as so much uncertainly prevails. And if one looks at European Autos, that may be exactly what is happening...

The China car tariff headline ramp lifted European Autos to Friday's close - but selling has returned.