Moving on

  • The revival of growth in the developed world has become apparent. Multiple longer term aspects of the revival are underestimated. We are ready to implement the single most significant adjustment to our recommended portfolio in the long transition from secure growth to equity value and risk.
  • We are downgrading the Consumer Staples category, Food and Beverages in particular, to under-weight. An exceptional period of commodity under-performance and out-performance of secure consumer assets has ended this summer.
  • We are upgrading two sectors to over-weight: Insurance (domestic value profitability and valuation return-to-mean) and Capital Goods (cyclical growth, marking the beginning of the recovery of investment ratios in Europe).

Recommended sector and market asset allocation

Our perception remains that equity markets will break out of the current phase of market consolidation before the end of this month. We assume that we need a degree of clarity about intervention in Syria, and perhaps the beginning of intervention itself, before a market movement can be sustained. Consolidation has not created a renewed bid for defensive assets. The news flow has remained positive, including the return of large scale corporate deal-making. The recovery of the global growth cycle from Q3 of last year, thanks to improvement in the developed world, is now established. We identify at least three aspects of the growth revival that are not yet fully appreciated by investors: commodity participation, the recovery of business investment and longer term profitability catch-up by Europe

We are now ready to implement our single most significant adjustment in the transition from secure growth to equity value and risk. We are downgrading the Consumer Staples category, and the sector of Food & Beverages in particular, to UW, thereby reducing our exposure to both secure growth assets and to the global consumer theme. Our interpretation is that an exceptional period of commodity under-performance and world-wide out-performance of secure consumer assets has ended this summer, signalled by stabilisation of producer assets in emerging markets since July.

The counterpart is to upgrade the Insurance sector (the vanguard of the return-to-mean of domestic value) and Capital Goods to over-weight. The Capital Goods sector represents global cyclical growth but the upgrade includes, especially, stocks with high exposure to European markets such as Siemens and Philips: the decisive influence is our interpretation that business investment ratios in Europe will recover from this time. We are also taking this opportunity to downgrade the small, “early cyclical” sector of Real Estate.

Weightings and asset allocation for the MSCI Europe Universe



09/09/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 15
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 UW (OW) 12
Food & Staples Retailing 1.7 0.8 N (OW) 2
Fod Beverage & Tobacco 10.7 0.5 UW (OW) 9
Household & Personal Product 1.8 0.5 UW (OW) 1
Energy 9.4 1.0 N 9
Financials 21.6 1.5 OW 24
Banks 11.0 1.5 OW 12
Diversified Financials 4.0 1.6 OW 5
Insurance 5.6 1.4 OW (N) 7
Real Estate 1.0 1.1 UW (N) 0
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 OW (UW) 12
Capital Goods 9.0 1.2 OW (UW) 10
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.0 N (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)
  1.07    
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