Without conviction

  • We are assuming that the phase of consolidation of trans-Atlantic equity markets will extend into March because trading lacks conviction. However, the downside risk is still skewed to the emerging space rather than to Europe. A period of comparative tedium in Europe is plausible.
  • We emphasise the link between the rebalancing of the world economy and the positive inflation outcomes in the trans-Atlantic economies. The effects of the change in the price regime are becoming visible in the equity space. Companies have lowered expectations for revenue growth in the sectors most engaged in global markets.

Recommended sector and market asset allocation

Equity markets are trading without conviction at this time. Accordingly, we are assuming that the phase of consolidation of trans-Atlantic equity markets will extend into March, implying that the S&P500 will not yet be able to extend a move above the 1850-65 area. We expect more problems in emerging markets over the next few weeks. However, the downside risk in Europe’s markets may be small because they are demonstrating more resilience this year relative to America and investors are understanding how to play the consolidation game. A period of comparative tedium in Europe’s markets is plausible.

The two economic trends that have been most under-estimated by consensus thinking since 2008 are the scale of the rebalancing of the world economy and the positive inflation outcomes in the trans-Atlantic economies. There is a link between the two, which helps to explain the way in which the perception of investment risk has shifted from the developed world to the emerging world. The change in the global price regime - the fading of deflationary pressures within the trans-Atlantic economies accompanied by a strengthening of downward pressures upon prices of internationally-traded goods - reflects a world-wide shift in actual and expected company profitability that is of great significance.

The effects of the change in the price regime are becoming visible in the equity space. There are two outstanding features of the current reporting season. Profit margins have improved on both sides of the Atlantic. However, revenue growth is mediocre in America and very low in Europe. Moreover, companies have lowered expectations for revenue growth, notably in the sectors most engaged in global markets. Largely for this reason, analysts’ earnings revisions have become clearly negative. It is not coincidental that the single most significant influence upon the behaviour of equity markets so far this year has been the under-performance of stocks in the categories of secure growth and cyclical growth with high global exposure.

Weightings and asset allocation for the MSCI Europe Universe



22/02/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 13
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 8
Food & Staples Retailing 1.7 0.8 UW 1
Fod Beverage & Tobacco 10.7 0.5 UW 6
Household & Personal Product 1.8 0.5 UW 1
Energy 9.4 1.0 UW 8
Financials 21.6 1.5 OW 24
Banks 11.0 1.5 OW 12
Diversified Financials 4.0 1.6 OW 5
Insurance 5.6 1.4 OW 6
Real Estate 1.0 1.1 N 1
healthcare 12.7 0.5 N 13
Healthcare Equipment & Services 1.2 0.4 N 1
Pharmaceuticals & Biotechnology 11.5 0.5 N 12
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 N 1
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 3
Exposure to risk
(beta value)
  1.06    
Lquidity ratio   4%    
* 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