Coherency Check

  • The consolidation in European equity is extending into March. “Buy-ondips” has become everyone’s credo. Market setbacks are shorter and shorter in duration. We cannot assume that there is going to be another opportunity of significance to buy cheaper stocks in this consolidation.
  • We focus upon the prime, defining trend within Europe’s financial space: the region’s valuation re-convergence, manifesting itself in the equity space through the perspective of domestic versus global assets. We are reinforcing the re-convergence theme by upgrading Utilities, Real Estate and Spain and by downgrading Basic Resources.

Recommended sector and market asset allocation

There is no surprise that the consolidation in European equity is extending into March. Although we are assuming that military force will not be used in the Ukraine a rapid resolution of the Crimean question seems unlikely. Prolonged negotiations and some form of semi-autonomy for a Crimea under virtual Russian control may be the most plausible outcome. There is nothing new to report about the US equity market. The pattern of consolidation with an upward bias is well-established. Our difficulty has been demonstrated by the response to developments in the Ukraine. Investors have learnt to play the consolidation game. Buy-on-dips is everyone’s credo. The market setbacks are shorter and shorter in duration. Doubtless, European equity will recover from the beginning of this week. We cannot assume that there is going to be another opportunity of any significance to buy cheaper stocks in this consolidation.

Accordingly, we focus upon the prime, defining trend within Europe’s financial space: the region’s valuation reconvergence, manifesting itself in the equity space through the perspective of domestic versus global assets. The market message of valuation re-convergence is radical. We are making a few adjustments to our recommended sector and market allocation to reinforce the re-convergence theme. We are upgrading the Utilities sector to N and the small sector of Real Estate to OW. Utilities is sheltered from the de-rating of the high valuation, high margin beneficiaries of global growth. It exemplifies the category of “domestic value” assets that is benefiting from financial pacification, the decline of the effective cost of capital and the reduction in sovereign and corporate credit risk, in the euro zone periphery above all. The regulated strip captures the valuation re-rating most effectively. Following several months of consolidation this should be a good time to raise exposure to the Spanish market to OW, which is a natural implication of our sector allocation. The motor of Spanish out-performance this year should be yield compression, continued improvement in credit conditions, debt re-negotiation and anticipation of decline of NPLs. As a counterpart we are downgrading the sector of Basic Resources from OW to N. Although the sector‘s relative EPS growth and valuation have stabilised the risk premium attached to the emerging-commodity space is unlikely to diminish significantly.

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 7
Financials 21.6 1.5 OW 25
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 OW (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 12
Capital Goods 9.0 1.2 N 9
Commercial Services & Suppy 1.4 0.8 UW 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 N (UW) 4
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