Not quite so Sad September

  • We suspect that this September will be more tedious than troubling, if only because investors have already become more cautious. The market pull-back may be complete by the middle of the month.
  • Our interpretation is that August marked the arrival of a lower, more normal rate of returns for developed equity. Although in comparative terms developed equity has rarely seemed so attractive the summer has marked the end of the long period of dramatic under-performance of commodity values relative to equities.
  • The stabilisation of Europe’s commodity-sensitive sectors is now apparent, emphasising the revival of the value style and the corresponding decline of the attraction of the secure growth theme. The expectation of catch-up by lower profitability value has as its counterpart the stabilisation of the price multiples attached to American leadership assets.

Recommended sector and market asset allocation

August has been a month of modest correction on Wall Street. Fund managers have already become more cautious. Accordingly, we suspect that September will be more tedious than troubling. The market pull-back may be complete by the middle of this month, at least if payrolls deliver a clear message and the uncertainty regarding intervention in Syria declines by a degree. Through this period of consolidation-correction the 1550-1600 zone on the S&P500 should constitute the market floor.

Our interpretation is that August marked the arrival of a lower, more normal rate of returns for developed equity markets following the exceptional period of high returns and lower volatility experienced since June 2012. This said the greatest change of 2013 concerns the comparative returns of different asset categories. Developed equity has become the alternative investment in a world that has rediscovered US$ interest rate risk. Although we must lower our expectations for absolute returns, in comparative terms developed equity has rarely seemed so attractive. We should not therefore be surprised that the summer has brought a reversal of the dramatic under-performance of commodity values relative to equities that characterised the period from the summer of 2011. The investor capitulation in the commodity-emerging space in Q2 was, indeed, the prelude to recovery. The stabilisation of Europe’s commodity-sensitive sectors is now apparent, emphasising the revival of the value style and the corresponding decline of the attraction of the secure growth theme.

Through this cycle “buy America, sell Europe” has been simple but effective. However, the good news about America is recognised. European stocks exposed to America and sensitive to the US$ still retain profitability leadership but their relative advantage is beginning to fade. The expectation of catch-up by lower profitability “value” elsewhere has as its counterpart the stabilisation of the price multiples attached to American leadership assets.

Weightings and asset allocation for the MSCI Europe Universe



30/08/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 14
Automobiles & Components 3.0 1.6 OW 4
Consumer Durables & Apparel 2.7 1.2 OW 4
Consumer Services 0.9 0.9 OW 2
Media 1.9 0.8 OW 3
Retailing 1.3 0.9 OW 2
Consumer Staples 14.1 0.5 OW 15
Food & Staples Retailing 1.7 0.8 OW 2
Fod Beverage & Tobacco 10.7 0.5 OW 1 2
Household & Personal Product 1.8 0.5 OW 2
Energy 9.4 1.0 N 9
Financials 21.6 1.5 OW 23
Banks 11.0 1.5 OW 12
Diversified Financials 4.0 1.6 OW 5
Insurance 5.6 1.4 N 6
Real Estate 1.0 1.1 N 1
healthcare 12.7 0.5 UW 9
Healthcare Equipment & Services 1.2 0.4 UW 1
Pharmaceuticals & Biotechnology 11.5 0.5 UW 8
Industrials 11.6 1.1 UW 10
Capital Goods 9.0 1.2 UW 8
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.0 UW 1
Information Technology 3.1 1.0 OW 4
Software & Services 1.4 0.9 OW 2
Technology & Hardware Equipment 0.9 1.2 OW 1
Semiconducors 0.9 1.0 OW 1
Materials 8.1 1.3 N 8
Telecommunication services 5.5 0.8 N 6
Utilities 3.9 0.9 UW 2
Exposure to risk
(beta value)
  1.04    
Lquidity ratio   4%    
* 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