The Slow Sink

  • Our interpretation is that May-June is crucial for this investment year. Yields of the most secure debt should bottom through this time establishing the floor for the volatility of major financial assets.
  • The under-invested should take advantage of the current phase of modest pull-back in equity. We are assuming that equity markets will continue to move upwards into the summer.
  • Both emerging equity and commodity indices have defined their trading ranges since 2011. Emerging equity may be able to move above its highs of 2012-2013 in Q3. However, there remain formidable structural obstacles to a return of out-performance by emerging markets.
  • We discuss the way in which the euro zone’s crisis has encouraged reversion-to-type in the UK, amplifying a shift in the perception of Europe that has been emerging for some time.

Recommended sector and market asset allocation

The logic of our equity consolidation-with-an-upwards-bias suggests that the S&P500 should pull back towards the 1900 area before it resumes its progress, providing the entry opportunity for funds that are not adequately invested. It may require only another week to accomplish this movement. We are assuming that equity markets will continue to move upwards into the summer, in Europe and Japan in particular. Our interpretation is that May-June is crucial for this investment year. Yields of the most secure debt should bottom through this time, led by US Treasuries, establishing the floor for the volatility of major financial assets. Our assumption is that the Euro registered a major reversal against the US$ in May. The threshold of significance in this respect is the US$1.3470-1.35 area.

Both emerging equity and commodity indices have defined their trading ranges since 2011. This year we expect emerging equity to deliver returns equivalent to that of developed equity. There could be a small degree of out-performance of the US benchmark. Emerging equity may be able to move above its highs of 2012-2013 in Q3. However, there remain formidable structural obstacles to a return of out-performance by emerging equity. The decline of profitability in the emerging world is mature but there are few signs of reversal at this time.

The UK demonstrates why debt markets condition volatility in currency markets. We discuss the way in which the euro zone’s crisis has encouraged reversion-to-type in the UK. It has amplified a shift in the perception of Europe that has been emerging for some time. In this respect the most important reform of the EU would be the re-foundation of economic policy in France that is currently nowhere in sight.

Weightings and asset allocation for the MSCI Europe Universe



16/06/2014 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 UW 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 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)
  1.05    
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