The tortoise and the hare

  • The economic data from America delivers a message of resilience. The improvement in the growth-inflation trade-off in the trans-Atlantic economies is allowing the extension of the bull market in Europe’s most distressed compartments of credit.
  • We are witnessing distribution within trans-Atlantic equity markets. Although we are approaching the point at which we will raise the liquidity ratio of our recommended portfolio we are not yet ready to make that call.
  • We suspect that a new phase of depreciation of the Yen may be commencing. Japan’s policy revolution is incomplete and America remains complicit in the adventure. We compare the very different logic of the decline of the deflation risk premium in Japan and the EZ.

Recommended sector and market asset allocation

We are witnessing distribution within trans-Atlantic equity markets between new money and old. The overall pattern of stock behaviour within Europe’s markets has become one of consolidation. Although the context remains favourable the profit-taking temptation will increase as year-end draws closer. We are approaching the point at which we will raise the liquidity ratio of our recommended portfolio, at the tail end of America’s reporting season. However, we are not yet ready to make that call.

Resilience is the message of the most recent economic data from America. It is the single most substantial component of the story of gradual economic climate change. The change in the global price regime is also becoming more evident. The improvement in the growth-inflation trade-off in the trans-Atlantic economies is allowing the extension of the bull market in Europe’s most distressed compartments of credit. We have the response to those who argue that the Euro is condemned to over-valuation. The currency that is becoming expensive within Europe is the GBP.

We contrast the logic of the two zones of deflation risk that have the most to benefit from the reflation in the global US$ bloc, led by America. Japan’s policy adventure implies a surge of above-trend profit growth for at least a couple of years. The uncertainty is the extent to which this stimulus will give rise to a more permanent increase in corporate profitability. The decline of deflation risk in Europe is associated with a more authentic case of return-to-mean of company valuations and profitability. The recent US economic data is opening the door to a new phase of the devaluation of the Japanese currency. Japan’s policy revolution is incomplete and America remains complicit in the adventure. When we see the Yen trading above the 100 level to the US$ we will assume that the second wave of Yen depreciation has commenced, which will accentuate the downward pressure upon valuations of producer assets throughout the rest of Asia.

Weightings and asset allocation for the MSCI Europe Universe



11/11/2013 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