The New Kakania?

  • Risk in equity markets is skewed to the downside up to next week’s payrolls report and ECB announcements. However, the bigger picture seems favourable. We expect the downward movement of yields of the most secure bonds and the growth correction in equity markets to exhaust themselves through May-June. We have a positive leading indicator. We feel confident that May has brought the reversal of trend for the US$’s value against European currencies.
  • The European election has not told us anything about Europe that we did not know already. A liberal Europe requires a more prosperous Europe. The single most significant challenge is the restoration of the competitiveness of the French economy.

Recommended sector and market asset allocation

We have labelled June the decisive month of this investment year. Our interpretation is that the disinflation surprise in the major economies is beginning to fade. Accordingly, the downward movement of yields of the most secure bonds and the growth correction in equity markets should exhaust themselves through May-June. In Europe the principal expression of the growth correction is the reversal of the out-performance of the smaller cap universe, especially within the euro zone. The implication is that volatility in debt and forex markets should bottom through this period. Precisely, we now feel confident that this month has brought the reversal of trend for the US$’s value against European currencies. It is not just the Euro. The US$ should trade better against all major currencies from this time. In this case positive returns for European indices in this quarter should be the prelude to better gains in Q3.

We do not expect the resumption of the upward movement of bond yields to be apparent soon, certainly not before next week’s payrolls report and ECB announcements. The risk in equity markets up to these rendez-vous is skewed to the downside. There should no longer be great controversy about the ECB’s initiatives. June 5th may be an anti-climax. We may have to be patient for the market verdict. However, a stronger US$ from this time gives us greater assurance that yields of US Treasuries should move higher through the year’s second half.

We discuss the European election. It has not told us anything about Europe that we did not know already. Europe has become a convenient scapegoat for the failings of national governments. However, a liberal Europe requires a prosperous Europe. Considerable obstacles to Europe’s recovery remain. The principal political message of the European election is that the most significant challenge is the restoration of the competitiveness of the French economy.

Weightings and asset allocation for the MSCI Europe Universe



26/05/2014 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 N 2
Retailing 1.3 0.9 N 1
Consumer Staples 14.1 0.5 UW 13
Food & Staples Retailing 1.7 0.8 UW 1
Fod Beverage & Tobacco 10.7 0.5 N 11
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 UW 10
Capital Goods 9.0 1.2 UW 7
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 6
Utilities 3.9 0.9 N 4
Exposure to risk
(beta value)
  1.04    
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