The Momentum-Value Message

  • The momentum-value trade that has been the dominant feature of recent stock behaviour indicates that investment risk is shifting from the value to the growth style. We relate its message to our strategic framework.
  • Although the immediate bias in equity markets is positive we would expect the “sell in May” crowd to become more influential as the month progresses. The logic of consolidation continues in the equity space. The defensive bias remains.
  • We explain why we expect the volatility of major financial assets to revive from this month of May. In particular, we are approaching a period of reversal for Europe’s credit markets and for major European currencies.

Recommended sector and market asset allocation

We discuss the momentum-value trade which has been the predominant feature of stock behaviour since early March. It indicates that investment risk is shifting from the value style to the growth style. We relate its message to our strategic framework. The pressures upon high multiple stocks in America is consistent with our understanding that 2014 is the last full year of the current cycle of cheap capital. This said, it is premature to call the end of the equity bull market because we have not yet reached the decisive point at which monetary super-stimulus will begin to be removed in America. The current correction in the growth universe should be absorbed without serious damage. It is, nonetheless, a warning sign. At this juncture our interpretation implies that we should not see a further decline in long-dated yields of US Treasuries.

Although the immediate bias in equity markets is positive we would expect the “sell in May” crowd to become more influential as the month progresses. The logic of consolidation continues in the equity space. The defensive bias remains. This said, we think this month of May will probably mark the period from which the volatility of major financial assets begins to revive. In particular, we are approaching a period of reversal for Europe’s credit markets and for major European currencies which should allow the region’s equity markets are to break out of their prolonged period of low volatility and low movement of major indices. Over the last year there has occurred an extraordinary degree of disconnection between US$ and Euro interest rate expectations which has enabled companies throughout the euro zone to access cheap capital. The economic justification of the euro system is being restored: the advantage of a substantially lower cost of capital for its constituents than would otherwise be possible. We expect that the period of bottoming of interest rate expectations in the euro area should occur in June-July. Its counterpart – and its catalyst - should be a lower Euro-US$ parity.

Weightings and asset allocation for the MSCI Europe Universe



05/05/2014 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 2
Retailing 1.3 0.9 N 1
Consumer Staples 14.1 0.5 UW 11
Food & Staples Retailing 1.7 0.8 UW 1
Fod Beverage & Tobacco 10.7 0.5 UW 9
Household & Personal Product 1.8 0.5 UW 1
Energy 9.4 1.0 N 9
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 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 11
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 UW 2
Software & Services 1.4 0.9 UW 1
Technology & Hardware Equipment 0.9 1.2 UW 0
Semiconducors 0.9 1.0 UW 0
Materials 8.1 1.3 N 8
Telecommunication services 5.5 0.8 OW 7
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