The thirteenth month

  • The return of volatility to the US Treasury market has marked the beginning of the end of the bull market in US$-denominated credit. Still, the context does not suggest that the rise in bond yields will gather momentum.
  • Market breakouts are frequently followed by return towards the point of breakout. The new floor area for major indices should be the year’s previous highs. Although the current phase of equity advance is mature our interpretation is that a final, upward movement can unfold into the summer before it exhausts.
  • The signals from debt markets constitute a warning for equity investors overexposed to secure larger cap growth. The balanced portfolio is the message. Commoditysensitive stocks have stabilised. We are downgrading the Swiss market.

Recommended sector and market asset allocation

Market breakouts – accelerations of trend – are frequently followed by return towards the point of breakout. Our recent equity breakout was rapid. So has been the pullback, led by the Japanese market. The new floor area for major indices should be the year’s previous highs; the 15901600 level for the S&P500. Accordingly, the early part of this month of June should be a good time at which to put money into stocks. Although the current phase of equity advance is mature our interpretation is that a final, upward movement can unfold into the summer before it exhausts.

The focus of market attention is the return of volatility to the US Treasury market. The message of disinflationary growth it has delivered through May has been favourable for the equity asset class. Our interpretation is that we are witnessing the beginning of the end of the bull market in US$denominated credit. The small rise in bond yields reassures us that the premium for investment security has begun to recede. However, a rapid adjustment in debt markets would cause disturbance. However, the context of budgetary restriction in America and of weakness in global manufacturing does not suggest that there is a significant risk that the rise in bond yields will gather momentum. The EuroUS$ parity seems to agree.

Portfolio overexposure to the large cap, secure growth leadership stocks of this cycle has become a source of investment risk, unless one believes that superlow bond yields are sustainable. For this reason we are reducing our exposure to the Swiss “global franchise” equity market that has been Europe’s best performer this year thanks largely to the resilience of the secure, global growth equity universe. The appropriate portfolio at this time is a balanced portfolio, between the growth and value styles and between cyclical growth and secure growth. In particular, it does seem to us that the relative performance of Europe’s commoditysensitive universe of stocks has stabilised.

Weightings and asset allocation for the MSCI Europe Universe



31/05/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.3 1.1 OW 14
Automobiles & Components 2.8 1.5 OW 4
Consumer Durables & Apparel 2.4 1.1 OW 3
Consumer Services 0.8 0.9 OW 2
Media 1.8 0.8 OW 3
Retailing 1.5 0.9 OW 2
Consumer Staples 14.9 0.5 OW 16
Food & Staples Retailing 1.7 0.7 OW 2
Fod Beverage & Tobacco 11.3 0.5 OW 12
Household & Personal Product 1.9 0.6 OW 3
Energy 9.8 1.0 N 10
Financials 20.9 1.5 OW 22
Banks 10.6 1.5 OW 12
Diversified Financials 3.8 1.6 N 4
Insurance 5.5 1.4 N 6
Real Estate 1.0 1.0 N 1
healthcare 13.0 0.6 UW 10
Healthcare Equipment & Services 1.2 0.5 UW 1
Pharmaceuticals & Biotechnology 11.8 0.6 UW 9
Industrials 11.2 1.2 UW 10
Capital Goods 8.7 1.2 UW 8
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.1 1.0 UW 1
Information Technology 3.1 1.0 OW 4
Software & Services 1.4 0.9 OW 2
Technology & Hardware Equipment 0.8 1.2 OW 1
Semiconducors 0.8 1.1 OW 1
Materials 8.4 1.3 OW 10
Telecommunication services 5.5 0.7 UW 3
Utilities 4.0 0.9 UW 2
Exposure to risk
(beta value)
  1.04    
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