Climate change and religion

  • Although the bias within European equity has become more cautious there are positive influences from debt and forex which provide signals of trend continuation. Anxiety about a “weak US$” is a false problem for Europe. The bull market in higher risk European credit is extending. We remain fully invested.
  • We explain why the cult of “equity quality” has become dangerous. However, at this stage of Europe’s transition the risk attached to higher quality stocks is of relative under-performance rather than of absolute capital loss.

Recommended sector and market asset allocation

The bias within European equity has become rather more cautious. Still, there are positive influences from debt and forex markets. They provide signals of trend continuation. We do not want to change our interpretation: we doubt there will be an authentic pullback in trans-Atlantic equity before the reporting season in America draws to an end.

In US$ markets the principal influence is the evidence that the growth of output and trade in America has not been affected significantly by the setback to consumer and business confidence. The gradual strengthening of the growth of global output is intact. In euro markets the principal influence is the evidence of continued deceleration of inflation. Further monetary support from the ECB is expected. The shift in US$-Euro rate differentials signals the end of the recent phase of US$ weakness relative to Europe. We would expect the Euro to move back to the middle of its longestablished range by the beginning of 2014. Anxiety about a “weak US$” is a false problem for Europe. At the same time the bull market in higher risk European credit is extending. Financial stress continues to decline. The inflows of capital into the EZ periphery is now reaching a scale that allows us to be more confident that the downward pressures upon real estate values in these economies is beginning to recede. It remains entirely plausible that the recovery of domestic demand in the developed economies will extend through 2014, with all that this implies.

We explain why the cult of “equity quality” has become dangerous: it cannot always be synonymous with low investment risk. The excess returns generated by Europe’s higher quality stocks since 2007 have been the consequence of five extraordinarily stressful years. There is a low probability that this kind of environment will persist. The debate can be summarised by reference to a simple question. How will this investment cycle end? At this stage the risk attached to higher quality stocks is of relative under-performance. There is not yet a high risk of absolute negative returns because the investment environment that gave rise to their excess returns cannot change rapidly.

Weightings and asset allocation for the MSCI Europe Universe



01/11/2013 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 3
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 10
Food & Staples Retailing 1.7 0.8 N 2
Fod Beverage & Tobacco 10.7 0.5 UW 7
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 8
Healthcare Equipment & Services 1.2 0.4 UW 1
Pharmaceuticals & Biotechnology 11.5 0.5 UW 7
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 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 OW 7
Utilities 3.9 0.9 UW 3
Exposure to risk
(beta value)
  1.07    
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