Spring in the air

  • The consolidation in Trans-Atlantic equity is extending into March. The crisis in the Ukraine is creating only the third opportunity through this phase to buy stocks at cheaper levels. We expect the performance of developed equity to improve in Q2.
  • The debate about a prolonged period of low inflation in the EZ has only just begun. The ECB is not in a hurry to respond. We expect investor expectations to fuel the extension of the bull market in lower quality credit through the year’s first half.
  • We reassess the stocks contained in the MSCI Industry sector to emphasise the significance of the global-domestic prism. Our bias is to domestic assets with operational leverage. We are reducing our rating of the Capital Goods compartment to Neutral despite the favourable cyclical context because we believe that the contribution to profitability from growth in external markets is beginning to decline.

Recommended sector and market asset allocation

Trans-Atlantic equity has remained in consolidation for over three months. We witnessed another false break-out last week. Through the consolidation there have been only two good opportunities to buy stocks at cheaper levels. The crisis in Ukraine is creating a third opportunity. We doubt that this episode will be very different from the two preceding occasions. We expect the performance of developed equity to improve in the second quarter, accompanied by a firmer US$. The winter slowdown of activity in America should come to an end in the spring. We think that March is a good month for investors to commit money to developed equity. We will probably reduce our portfolio liquidity ratio to the “fully invested” level in the course of this month.

The price regime has constituted the dominant theme of our recent commentary. The debate about a prolonged period of low inflation in the euro area has only just begun. The ECB is not in a hurry to respond. We expect investor expectations to fuel the extension of the bull market in lower quality credit through the year’s first half, allowing further compression of spreads.

Our strategy in European equity at this time consists in the application of the principle of valuation re-convergence within the region. Our bias is to domestic assets with operational leverage. We must call into question without exception the premiums for investment security and for globally-generated excess profitability that have accumulated through the years of Europe’s economic and financial distress. We are devoting the largest part of this week’s publication to a reassessment of the stocks contained in the MSCI Industry sector in order to emphasise that the global-domestic prism concerns every stock traded in Europe. In particular, we are reducing our rating of the Capital Goods compartment from OW to Neutral despite the favourable cyclical context because we believe that the contribution to profitability from growth in external markets is beginning to decline.

Weightings and asset allocation for the MSCI Europe Universe



21/02/2014 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 N (OW) 12
Capital Goods 9.0 1.2 N (OW) 9
Commercial Services & Suppy 1.4 0.8 UW (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)
  1.05    
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