French lesson

  • We are raising our portfolio liquidity ratio from the low level of 3% to 4%. Although we expect Europe’s markets to attempt to push higher this month we consider that the potential for further gains is limited at this time.
  • We are raising our exposure to the French market from N to OW, exemplifying our commitment to a balanced portfolio this year. We explain why we expect the risk premium attached to French equity to decline significantly through 2013.
  • We re-iterate our interpretation that the summer of 2012 marked the climax of the premium for investment security. The “domestic versus global” perspective within Europe is just another derivative of a more universal valuation return-to-mean story.

Recommended sector and market asset allocation

We are making two small adjustments to our recommended portfolio. First, we are raising our portfolio liquidity ratio from the low level of 3% to 4%. Pan-European equity benchmarks have just reached the 10% threshold for year-to-date gains, which represents our minimum target for the year. Although we expect Europe’s markets to attempt to push higher this month we consider that the potential for further gains is now limited. The constraint upon equity gains is more apparent in the US market than in Europe. We do not see the S&P500 index above the 1720-40 level any time soon. Anxiety about the September FOMC meeting will return before long. If this interpretation is correct the currency advantage should shift back to the US$ against the Europeans from this time. We do not expect to see the Euro trade above the US$1.34-1.45 level.

In the second place, we are raising our exposure to the French market from N to OW. France exemplifies our commitment to a “balanced portfolio” this year. By composition, it is the most evenly distributed of Europe’s major equity markets. It is a barometer of regional risk, and of the risk attached to the euro zone especially. Both these influences should support French out-performance through this year. Europe’s exit from recession and the improved performance of domestic value compartments that have held the market back imply that the risk premium attached to French equity should decline significantly through 2013 as a prelude to profit out-performance through 2014. As usual, financials are the barometer of the change.

It is finally possible to anticipate a degree of recovery for the profitability of domestically-dependent assets in Europe beyond this year. Correspondingly, our interpretation is that trans-Atlantic equity valuations are beginning to re-converge once again, albeit slowly and irregularly. The turning point was the summer of 2012 which marked the trough of the relative valuation of Europe’s domestic value universe of stocks. Indeed, the “domestic versus global” perspective in Europe is just another derivative of a more universal valuation return-to-mean story.

Please note that our next EIN will be distributed on August 26th

Weightings and asset allocation for the MSCI Europe Universe



08/08/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.8 1.1 OW 15
Automobiles & Components 3.0 1.5 OW 4
Consumer Durables & Apparel 2.7 1.2 OW 4
Consumer Services 0.9 0.8 OW 2
Media 1.9 0.8 OW 3
Retailing 1.3 0.8 OW 2
Consumer Staples 14.4 0.5 OW 15
Food & Staples Retailing 1.7 0.8 OW 2
Fod Beverage & Tobacco 10.9 0.5 OW 12
Household & Personal Product 1.8 0.5 OW 2
Energy 9.4 1.0 N 9
Financials 21.8 1.5 OW 24
Banks 11.0 1.6 OW 12
Diversified Financials 4.0 1.6 OW 5
Insurance 5.7 1.4 N 6
Real Estate 1.0 0.9 N 1
healthcare 12.7 0.6 UW 9
Healthcare Equipment & Services 1.2 0.5 UW 1
Pharmaceuticals & Biotechnology 11.5 1.2 UW 8
Industrials 11.5 1.2 UW 10
Capital Goods 8.9 1.2 UW 8
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.1 UW 1
Information Technology 3.1 1.0 OW 4
Software & Services 1.4 0.8 OW 2
Technology & Hardware Equipment 0.9 1.1 OW 1
Semiconducors 0.9 1.0 OW 1
Materials 7.8 1.3 N 8
Telecommunication services 5.6 0.7 N 6
Utilities 4.0 0.9 UW 2
Exposure to risk
(beta value)
  1.06    
Lquidity ratio   4% (3%)    
* The exposure to risk is measured by the weighted average of 2-y betas.
We manage the liquidity ratio within a 0-10% rank.
Source: Kepler Cheuvreux