Shape of things to come

  • The S&P500 has declined to the threshold between year-end consolidation and authentic market correction. The year-end rally could begin from this week. However, no rally will be sustained until the uncertainty entailed by the exit question is removed. We are waiting to return to equities at lower levels in the New Year.
  • We return to the salient features of this investment year, notably the rise of real yields of the most secure debt and the change in the price regime. The next major surprise in the logic of recovery should concern corporate spending in the developed economies.

Recommended sector and market asset allocation

Our interpretation is that the consequence of QE3-exit through 2014 should be the stabilisation of equity price multiples in America. This is the process that we think is beginning at this time. We have been thinking that the disruption associated with QE3-exit should eventually see the S&P500 pull back to at least the 1730-50 level, and possibly to the 1700 area, in the first weeks of the New Year. This is the entry opportunity that we are waiting for. The S&P500 has declined to the threshold between year-end consolidation and authentic correction at the 1770-80 level. The traditional year-end rally could begin from this week because we doubt that the FOMC is ready yet to announce the timetable for withdrawal of QE3. However, no rally will be sustained until the uncertainty entailed by the exit question is removed. The year-end consolidation demonstrates that there is no longer polarisation between secure growth and higher risk value in Europe’s equity space of the kind that characterised the period of chronic anxiety about growth.

We return to the salient features of this investment year. We would argue that the most significant discontinuity of 2013 has been the rise of the real yields of the most secure debt. The principal counterpart is the end of de-leveraging in the private sector of the leading developed economies. The downside risks attached to growth have diminished significantly. The subsidiary theme is the change in the price regime which promises to ensure quasi price stability for some time. Inflation outcomes throughout the developed world have been better than expected even though the growth of output has picked up. The message concerns the re-distribution of profitability and the displacement of investment risk world-wide. The profitability of the beneficiaries of the global growth theme is coming under greater pressure. The corollary is the gradual recovery of the profitability of depressed domestically-dependent activities in the developed world.

The next major surprise in the logic of recovery should concern corporate spending in the developed economies. The recovery of business investment may require some time to gather momentum. However, it should come, led by America. To our way of thinking, by 2015 the revival of business spending will probably be incompatible with the maintenance of zero interest rates in the USA.

Weightings and asset allocation for the MSCI Europe Universe



13/12/2013 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 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 23
Banks 11.0 1.5 N 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 12
Healthcare Equipment & Services 1.2 0.4 N 1
Pharmaceuticals & Biotechnology 11.5 0.5 N 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 6
Utilities 3.9 0.9 UW 2
Exposure to risk
(beta value)
  1.06    
Lquidity ratio   5%    
* 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