The Empire strikes back

  • The breakout-acceleration of the bull market on Wall Street reflects improvement in the expected trade-off between growth and inflation: “disinflationary growth”. In short, there is finally recognition by the consensus of the foundations of American investment leadership in this cycle.
  • European equities are a double derivative of the bull market in US equities and in domestic credit. “Disinflationary growth” allows both to extend.
  • We are raising exposure to cyclical technology stocks at the expense of Utilities.

Recommended sector and market asset allocation

  • We have been witnessing a breakout-acceleration of the bull market on Wall Street. The investment industry has been taken by surprise. The decline in the perception of economic and financial risk has been the motor of the current phase of advance of equity values. The new element is improvement in the expected trade-off between growth and inflation in the USA: “disinflationary growth”. There is more confidence in the outlook for domestic demand in America whilst expectations of imported inflation have been revised down. In short, there is finally recognition by the consensus of the foundations of American investment leadership in this cycle.
  • European equities are a derivative of the external bull market on Wall Street and of the internal bull market in credit. “Disinflationary growth” allows both these bull markets to extend. Measures of credit stress have fallen to record low levels:
  • a context of cheap capital is finally arriving in Europe. Our portfolio messages have not changed. The defensive parenthesis of the February-April period is closed: higher risk stocks are outperforming in this phase, both in the growth and value universes.
  • We are moving over-weight in the Technology compartments of hardware and semiconductors due to the turn in cyclical assets in general, and the signs of revival of growth expectations in the USA in particular. The counterpart is to downgrade the Utilities sector to under-weight: an (imperfect) bond proxy is not where we want to be at this time. We are also upgrading the markets of the euro area from UW to Neutral at the expense of the Nordic area.

Weightings and asset allocation for the MSCI Europe Universe



17/05/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.2 1.1 OW 14
Automobiles & Components 2.7 1.5 OW 4
Consumer Durables & Apparel 2.4 1.5 OW 3
Consumer Services 0.9 0.9 OW 2
Media 1.8 0.8 OW 3
Retailing 1.5 0.9 OW 2
Consumer Staples 14.9 0.5 OW 16
Food & Staples Retailing 1.7 0.7 OW 2
Fod Beverage & Tobacco 11.4 0.5 OW 12
Household & Personal Product 1.8 0.6 OW 3
Energy 9.8 1.0 N 10
Financials 21.1 1.5 OW 22
Banks 10.7 1.5 OW 12
Diversified Financials 3.8 1.6 N 4
Insurance 5.5 1.4 N 6
Real Estate 1.1 1.0 N 1
healthcare 12.8 0.6 UW 10
Healthcare Equipment & Services 1.2 0.5 UW 1
Pharmaceuticals & Biotechnology 11.6 0.6 UW 9
Industrials 11.1 1.2 UW 10
Capital Goods 8.6 1.2 UW 8
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.1 1.0 UW 1
Information Technology 3.1 1.0 OW(UW) 4
Software & Services 1.5 0.9 OW 2
Technology & Hardware Equipment 0.8 1.2 OW(UW) 1
Semiconducors 0.8 1.1 OW(UW) 1
Materials 8.4 1.3 OW 10
Telecommunication services 5.5 0.7 UW 3
Utilities 4.0 0.9 UW(N) 2
Exposure to risk
(beta value)
  1.04    
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