Growth, actually

  • A world-wide growth surprise has shaped all financial markets through this quarter. The surprise is most authentic as regards the consensus view of Europe and China.
  • The growth surprise marks the arrival of “latecomer money” to equity markets. “Over-weight Europe” is now consensus.
  • We expect equity markets to break out of their current consolidation phase before the end of this month. We are reducing our portfolio liquidity ratio from 4% to 3%.
  • We are now ready to move over-weight in the markets of the Euro zone. Our focus is the EZ core rather than the periphery at this point. As a counterpart we are moving to UW in the UK market.

Recommended sector and market asset allocation

Equity markets are moving most where least money is invested. Europe’s value stocks have broken out of their recent consolidation. Emerging markets are reviving. The move into higher risk, lower quality has picked up. The common theme at work world-wide through this quarter is the growth surprise. In particular, the economic data from Europe challenges the growth despondency in the region. Anxiety about a hard landing in China has been blown away. We discuss the single most influential market movement of this investment year: the surge in implied real yields of long-dated Treasuries. It marks the end of the climate of “growth psychosis” that characterised the two years from the spring of 2011. It is not therefore surprising that the premium for equity growth in Europe has recovered from its lowest level on recent record. Accordingly, it is plausible that this quarter marks the point at which equity value begins to out-perform the equity growth style in the region.

The growth surprise also marks the arrival of “latecomer money” to equity markets. “Over-weight Europe” is now consensus. We are more than ever convinced that the investor capitulation in the commodity-emerging space created a tactical opportunity of great value. We are upgrading emerging equity markets from an international asset allocation perspective. We should have entered from this quarter a period of relative international under-performance of the US equity market as a consequence of the decline in the premium for investment security. For the same reason we are ready to move OW the markets of the EZ following the setback they experienced from the time of Italy’s election in February, but in their core markets rather than the periphery. This shift was implicit in the changes in sector allocation we introduced last week. We are taking the first steps away from a balanced portfolio towards one with over-exposure to value. As the counterpart we are moving to UW in the more defensive UK market. We said that we expected equity markets to break out of the current phase of consolidation before the end of this month. Although the FOMC meeting may be followed by some profit-taking it is unwise to assume that markets will weaken significantly from this point. To emphasise the point we are reducing our portfolio liquidity ratio from 4% back to 3%.

Weightings and asset allocation for the MSCI Europe Universe

13/09/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 16
Automobiles & Components 3.0 1.6 OW 5
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 11
Food & Staples Retailing 1.7 0.8 N 2
Fod Beverage & Tobacco 10.7 0.5 UW 8
Household & Personal Product 1.8 0.5 UW 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 7
Real Estate 1.0 1.1 UW 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 12
Capital Goods 9.0 1.2 OW 10
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.0 N 1
Information Technology 3.1 1.0 OW 5
Software & Services 1.4 0.9 OW 2
Technology & Hardware Equipment 0.9 1.2 OW 2
Semiconducors 0.9 1.0 OW 1
Materials 8.1 1.3 N 8
Telecommunication services 5.5 0.8 N 5
Utilities 3.9 0.9 UW 2
Exposure to risk
(beta value)
Lquidity ratio   3% (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