Barometer Rising

  • Our barometers of the investment climate are rising as we enter the spring, albeit gently. We expect that benchmark equity indices of the European region will deliver almost all of their performance this year through Q2 and Q3.
  • We are assuming that the recent bounce in the US$ price of gold is complete and that US$1.39-1.40 area is the ceiling for the Euro-US$ parity because the upward movement of yields of US Treasuries has resumed.
  • Europe’s smaller cap bull market should continue to roll. The difference over the next few months should be the stronger participation of large cap globals and financials.

Recommended sector and market asset allocation

Our barometers of the investment climate are rising as we enter the spring, albeit gently. The combination of less ebullient investor sentiment and encouraging forward indicators is healthy. We have been assuming that the benchmark equity indices of the European region will deliver almost all of their performance this year through Q2 and Q3. We have no reason to change this interpretation. Although the longer term implications of the turmoil in the Ukraine are uncomfortable neither Russia nor Europe desires an escalation of the conflict at this time.

Our interpretation is that the upward movement of yields of US Treasuries is resuming. Above-trend growth should be restored in America in Q2. The Fed has reminded investors of our probable future: the return to more-normal remuneration of deposits through 2015 and 2016. Even in a context of low and stable inflation it is plausible to think that the yield on the 10-year Treasury note can trade above the 3% threshold in Q2. Accordingly, we have two reference assumptions: that the recent bounce in the US$ price of gold is complete and that US$1.39-1.40 area is the ceiling for the Euro-US$ parity.

Through the winter the re-convergence theme in both European debt and equity markets has extended. We assume that the smaller cap bull market will continue to roll. The problem in the European equity space is to be found in Europe’s large cap, globally-oriented stocks, to many of which a label of comparative security and higher quality has been attached. Europe’s markets require better balance between their domestic and global assets in order to advance substantially. The US$ has become, in many respects, the symbol of this balance. If the US$ behaves better we can expect a stronger bid for Europe‘s more global stocks. We should also see a better performance by Europe’s large cap financials which have consolidated over the last six months and for which the context should remain favourable.

Weightings and asset allocation for the MSCI Europe Universe



24/03/2014 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 2
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 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