The Slow Cycle re-emphasised

  • The Fed has demonstrated its “slow cycle” policy bias. Exceptional monetary stimulus is being maintained even though global output and trade is strengthening. We assume that the beginning of exit from QE3 has been delayed until December, or January at latest. The first wave of adjustment in debt markets is now complete.
  • Prospects for US equities have not changed significantly. September marks another milestone for the revival of EZ equity markets. The argument to reduce exposure to US$ stocks in Europe to the benefit of European-and-credit dependent value receives support. The tactical return to the commodity-emerging space has been vindicated.

Recommended sector and market asset allocation

September has brought another milestone for the equity bull market. The broad indices of EZ equity have moved above their highest levels of early 2011. We expect these markets to consolidate above this support area through October.

The Fed has demonstrated its policy bias, shared by all Central Banks to some degree, emphasising its conviction that we remain in a “slow cycle” in which the transmission of monetary stimulus operates very gradually. We are assuming that the beginning of exit from QE3 has been delayed until December, or January at latest, at the time of the change-over at the Fed. The first wave of adjustment in debt markets is now complete. The phase of détente has begun. We expect to see bond yields in most markets consolidate around current levels - corresponding to the 2.5-3.0% area for 10-year T-note - for some considerable time. Exceptional monetary stimulus is being maintained even though global output and trade is strengthening. This context encourages valuation re-convergence within Europe. It should now be clear why the long US$-short European currencies temptation of the last year has been wrong. The US$ is no longer a structurally weak currency but America is not ready for sustained currency appreciation.

Prospects for US equities have not changed significantly. However, when “tapering” does come it is now more likely to be associated with a significant market correction. The Fed’s policy bias benefits credit-sensitive equity in both America and Europe. The argument to reduce exposure to the US$ stocks in Europe to the benefit of European-and-credit dependent value receives support. The tactical return to the commodity-emerging space has been vindicated. This is a very unlikely context for financial crisis and recession in the emerging world, and in China in particular. The dangerous period for these assets lies ahead, in the 2015-2016 period.

Weightings and asset allocation for the MSCI Europe Universe



20/09/2013 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 1.6 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 2
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)
  1.08    
Lquidity ratio   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