Under Observation

  • Has the New Year brought another wave of equity advance? The moves of the very beginning of the year often fade or are reversed. We will wait a little before we conclude, if only because we see little further upside on the US market at this point.
  • In fact, the year has begun with greater strength in European credit than in equity. The transition from a credit bull market to an equity bull market is taking place slowly. This question is of considerable importance, for the euro zone especially.
  • Our philosophy of the “balanced portfolio” remains valid for 2014. We explain in our strategic work why long-established trends in the behaviour of equity style are breaking down.

Recommended sector and market asset allocation

At first sight the New Year message from European equity seems clear. Has not another wave of advance of equity values begun, led by the Banks? Should we not participate wholeheartedly? Market behaviour at the very beginning of the year can be misleading. Often, initial moves can fade or be reversed in the following weeks. It is not yet clear to us that this is the time for renewed advance, if only because we see little further upside on the US market at this point. We want another week of observation before we draw firm conclusions about January trading. We note that few companies in Europe are yet translating the better economic outlook into profit surprises. What is clear is that investors have not been tempted to return to defensive stocks: they have understood that the world is changing. The stocks most dependent upon European markets continue to out-perform.

Europe’s investment year begins with a paradox: there is more movement in European credit than in equity. The bull market in lower quality, higher risk credit is extending from 2013 into 2014. We argue that peripheral EZ sovereign bonds are returning to their pre-crisis status as rate products rather than credit products. The principal message of market behaviour in Europe in this New Year is that the transition from a credit bull market to an equity bull market is taking place slowly. We explain why this question is of considerable importance, especially for the euro area.

We recapitulated our strategic investment framework in the “Special Number” of EIN of January 8th. Our philosophy of the “balanced portfolio” remains valid for 2014. Current investment trends are no longer controversial. We focused therefore upon our interpretation of the most significant discontinuities at work in the investment environment from the perspective of the longer-term equity fund manager. We took particular aim at the “cult of equity quality”.

Weightings and asset allocation for the MSCI Europe Universe



10/01/2014 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 9
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 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