April is the cruellest month

  • The period of frustration since last November has finally given rise to an authentic correction among America’s growth-momentum stocks, generating a genuine degree of market disruption and investor anxiety. It is difficult to generate a market recovery without such a correction.
  • Our understanding is that we are not at the beginning of a market correction but in its late stage. April should be the last month of this period of frustration. The next couple of weeks should be decisive.
  • Investment risk has become as great for Europe’s growth stocks as for the value universe. The source of current disturbances is not the domestic economy. It is not coincidental that the US stock market is losing its leadership of global benchmarks. We expect European equity to be able to out-perform American benchmarks in local currency terms from this month.

Recommended sector and market asset allocation

We were tempted to believe that Europe’s equity markets were breaking out of the frustrating pattern of stop-go of the last few months. We think that the call was not wrong but premature. The period of frustration since last November has finally given rise to an authentic correction among America’s high multiple growth-momentum stocks, generating a genuine degree of market disruption and investor anxiety. It is difficult to generate a market recovery without an authentic correction. Many hedge funds are reducing their exposure to equity. Finally in this phase of frustration there is a stronger bid for the more defensive stocks. Our understanding is that we are not at the beginning of a market correction but in its late stage. Accordingly, we would not expect the decline of the Nasdaq composite to go beyond the 3700-3900 area. In this case we doubt that we will see the S&P500 trade below the 1750 level that was the low point of the beginning of February. April should be the last month of this period of frustration. The catalysts for improvement are available. Expectations for the reporting season are low. We are just beginning to see a pick-up in the macro-economic news flow in America. We consider that the next couple of weeks should be decisive.

We observe that investment risk has become as great for Europe’s growth stocks as for the value universe. The source of current disturbances is not the domestic economy. Domestic value assets are supported by the continued decline in the cost of capital, at least in the euro zone. Global value stocks in the sectors of Energy and Materials are supported by the recovery of the relative performance of emerging markets. It is not coincidental that the US stock market is losing its leadership of global benchmarks. We expect European equity to be able to out-perform American benchmarks in local currency terms from this month. Two developments are required. First, the downward pressure upon yields of the most secure government debt should be reversed. Second, the upward pressure on the Euro-US$ parity should also be released. We expect to receive these signals over the next few weeks.

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 11
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 9
Food & Staples Retailing 1.7 0.8 UW 1
Fod Beverage & Tobacco 10.7 0.5 UW 7
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 11
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)
  1.05    
Lquidity ratio   3%    
* 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