Almost all swans are white

  • Although the ECB’s package of non-orthodox measures of reflation was signalled in advance it still managed to engineer a positive announcement effect. Our reservations are modest. Growth in America is solid, although mediocre.
  • We should expect a phase of market consolation at this point. However, equities look set to move higher into the summer, with Europe and Japan most attractive.
  • Within Europe’s equity space we want to keep a bias to the value style, and to domestically-oriented sectors that are sensitive to reflation. We are assuming that the correction in smaller caps is complete. The framework for a stronger US$ against European currencies has been set.

Recommended sector and market asset allocation

We devote a large part of this week’s note to the ECB. Although its package of non-orthodox measures of reflation was signalled in advance it still managed to engineer a positive announcement effect. Our reservations are modest. The most recent US economic data indicates that growth in America is solid, although mediocre. The investment industry is now realising that it has become over-cautious. It finds itself somewhat under-invested in a context in which there is no evident “value” left in equity markets. We suspect that the immediate upside potential on the US market is exhausted. However, there are too many under-invested investors for us to think that a significant market setback is probable. We think that the under-invested investor should use the market consolidation of the next week or two to increase their equity exposure. Europe and Japan are more attractive markets than America at this point.

We think that the bull market in higher risk credit is in its final stage. We are assuming that the decline in yields of long-dated Treasuries completed in May. However, there is no immediate catalyst for investors to remove their long positions in EZ credit. European equity – and especially EZ equity – remains a derivative of the credit bull market. The defensive parenthesis of the period from March to May is closed. We are assuming that the correction in smaller caps is exhausted. We want to keep a bias to the value style, and to domestically-oriented sectors that are sensitive to reflation. EZ banks are one of the principal beneficiaries of the ECB’s anti-deflation initiatives. We assume that the out-performance of the markets of the EZ periphery will extend into the summer. The framework for a stronger US$ against European currencies has been set.

Weightings and asset allocation for the MSCI Europe Universe



06/06/2014 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 12
Food & Staples Retailing 1.7 0.8 UW 1
Fod Beverage & Tobacco 10.7 0.5 N 10
Household & Personal Product 1.8 0.5 UW 1
Energy 9.4 1.0 N 9
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 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 3
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)
  1.05    
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