Investing without fear

  • European equity has started the year strongly. Valuation re-convergence remains the master trend. The premium for investment security continues to decline. Smaller caps remain the place to be.
  • However, the US equity market is going nowhere, despite the positive sentiment. Emerging equity has declined. The micro-economic support for Europe’s markets is weak. We think that the patient investor will find better opportunities beyond this month of January, as was the case last year.

Recommended sector and market asset allocation

January trading always provides useful indications about market trends. We would emphasise four of our strategic assumptions for 2014 that appear to be compatible with the January message. First, we assume a lower rate of returns for US equity because the reduction of monetary stimulus will make a difference. Second, we assume more tedium for major US-Europe forex parities but with a stronger tone for the US currency. Third, we assume that the transition from a credit bull market to an equity bull market will take place, but slowly. Fourth, we assume international outperformance for European equity driven by expectations of future risk and returns. The perception of investment risk is rising in the emerging space and declining in Europe. The counterpart is the out-performance of Europe’s universe of domestic stocks relative to their global counterparts.

In many respects market trends this month remind us of January 2013. There is a similar context of “investing without fear” in developed equity. From many perspectives European equity has started the year strongly. The mobile money has clearly understood Europe’s valuation re-convergence, having moved into higher risk, lower-rated, domesticallyexposed stocks sensitive to credit. The premium for investment security continues to decline. Smaller caps remain the place to be. There is out-performance of US and global benchmarks. However, in 2013 Europe’s equity markets also enjoyed a bullish January. February and March were more difficult. The US equity market is going nowhere, despite the positive sentiment. Emerging equity has actually declined. The micro-economic support for Europe’s markets is weak. Profit re-convergence is not yet validating the valuation re-convergence. There is not a new growth surprise: we have confirmation of economic improvement but not further acceleration.

The first rule of investing in a context in which there is no fear is that patience is required. We still think that the patient investor will find better opportunities beyond this month of January, as was the case in 2013.

Weightings and asset allocation for the MSCI Europe Universe



17/01/2014 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 2
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 UW 1
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 13
Capital Goods 9.0 1.2 OW 10
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.0 OW 2
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)
  1.07    
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