Capitulation without conviction

  • We are returning the liquidity ratio of our recommended portfolio to a neutral level for the first time this year. The message is consolidation rather than authentic correction. We doubt that genuine market correction will come until early next year. The substantial problem on the horizon is the difficulty of withdrawing monetary stimulus in America without disturbance.
  • We are moving closer to portfolio balance by downgrading Europe’s banks from OW to neutral and upgrading HealthCare from UW to neutral. For the same reasons, we are downgrading the French market to neutral and upgrading Switzerland to neutral.
  • We discuss the “capitulation without conviction” in the investment world, emphasising the characteristic imbalance between the price of equity risk and the price of equity growth in trans-Atlantic markets.

Recommended sector and market asset allocation

We think that it is time to call the market consolidation. Distribution is already apparent in Europe’s markets. The rising tide of equity issuance has become a negative signal. We consider that the short-term trade-off between risk and returns on the US market is becoming unfavourable. We are returning the liquidity ratio of our recommended portfolio to a neutral level for the first time this year, raising it from 3% to 5%. We have been fully invested, “buying the dips”. We are now sellers of further market advance..

The message is market consolidation rather than authentic correction. We expect that profit-taking will predominate from the end of America’s reporting season into December, followed by a year-end rally. We suspect that trans-Atlantic equity markets will end this year not far from their current levels. We doubt that genuine correction will come until next year’s first quarter. The substantial problem on the horizon is the difficulty of withdrawing monetary stimulus in America without disturbance due to the psychological over-dependency upon the Federal Reserve. Our intention is to reinforce our exposure to higher risk value in next year’s first quarter.

We are making two changes to our recommended asset allocation that are consistent with the message of year-end consolidation. We are downgrading Europe’s banking sector from OW to neutral. The counterpart is to upgrade the HealthCare sector from UW to neutral. Our intention is to move closer to portfolio balance in terms of security and risk, and in terms of value and secure growth. For the same reasons, we are downgrading the French market from OW to neutral. The counterpart is to upgrade the Swiss market from UW to neutral.

We discuss the “capitulation without conviction” in the investment world. The decline in economic and financial risk in the developed economies is a process that encourages growth. This process continues to unfold. And yet a substantial section of the investment community has moved from scepticism about growth to denial about the improvements that are being registered.

Weightings and asset allocation for the MSCI Europe Universe



15/11/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 14
Automobiles & Components 3.0 1.6 OW 4
Consumer Durables & Apparel 2.7 1.2 OW 3
Consumer Services 0.9 0.9 OW 1
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 23
Banks 11.0 1.5 N (OW) 11
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 N (UW) 12
Healthcare Equipment & Services 1.2 0.4 N (UW) 1
Pharmaceuticals & Biotechnology 11.5 0.5 N (UW) 11
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 2
Exposure to risk
(beta value)
  1.06    
Lquidity ratio   5% (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