Frustration complete

  • Our interpretation is that Europe’s markets are breaking out of the consolidation pattern that has prevailed since last November, led by the value universe. We expect the bid for the region’s large cap global stocks to improve because the pressure upon emerging assets has been released and the context is becoming more favourable for the US$. At the same time the bull market in higher risk credit continues to roll. The ECB’s ready-to-intervene insurance is effective.
  • We are reducing our portfolio liquidity ratio from 4% to 3% because we want to be fully invested in this quarter. We can no longer count upon significant market setbacks of the kind we have witnessed in recent months.
  • We are upgrading the French market from N to OW, despite the underperformance of the French economy. The continuation of the bull market in lagging value in the EZ should now assist French equity. We are also downgrading the Retail sector because the relative profitability of this compartment is weakening despite continued gradual recovery of consumer confidence and spending in the region.

Recommended sector and market asset allocation

Last Friday represented the ninth consecutive positive close for broad pan-European equity benchmarks. Our interpretation is that Europe’s markets are breaking out of the consolidation pattern that has prevailed since last November, led by the value universe. We expect the bid for the region’s large cap global stocks to improve because the pressure upon emerging assets has been released and the context is becoming more favourable for the US$. At the same time the bull market in higher risk credit continues to roll. The decline in the risk premium attached to EZ peripheral debt and equity has accelerated. The ECB’s ready-to-intervene insurance is effective. Accordingly, the bid for larger cap financials has strengthened, at least in the euro zone.

Upside potential for US equity indices remains limited. The story here remains “consolidation with an upward bias”. Accordingly, the break-out of Europe’s markets implies out-performance vis-à-vis US benchmarks. A firmer US$ and better behaviour by emerging currencies is part of the script. We can no longer count upon significant market setbacks of the kind we have witnessed in recent months. We want to be fully invested in this quarter. The pullback of the beginning of this week provides us with the opportunity to reduce our portfolio liquidity ratio from 4% to 3%.

We are upgrading the French market from N to OW, despite the weakness of government and the under-performance of the French economy. The risk premium attached to Italian and Spanish equity has almost converged upon that of the French market. The continuation of the bull market in lagging value in the EZ should now assist the French market. We are downgrading the Retail sector in the DJ Stoxx universe from N to UW. The relative EPS growth and relative profitability of this compartment is weakening despite continued gradual recovery of consumer confidence and spending in the region.

Weightings and asset allocation for the MSCI Europe Universe



04/04/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.9 1.1 OW 12
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 N (OW) 1
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 26
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)
  1.07    
Lquidity ratio   3% (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