Quarter to Midnight

  • Wall Street this month has not provided equity investors with easy entry points. We should expect more of the same: another small pullback from this time into the beginning of July. The big picture tells us to stay invested. Equity returns this year should be delivered in Q2 and Q3.
  • Although higher risk stocks have revived on Wall Street Europe has not followed the American example. We cannot expect to see significant adjustment in the forex market until the reversal in the US$ bond market is more apparent. Consequently, the current bias in Europe is to larger caps, to value and to defensive themes.

Recommended sector and market asset allocation

Wall Street this month has not provided equity investors with easy entry points. The market pullbacks have been small. Nonetheless, we have no reason to change our view: the US market cannot sustain an advance at this time. Accordingly, we should expect another small pullback from this time into the beginning of July. The bigger picture tells us to stay invested. Equity returns this year should be delivered in Q2 and Q3.

Although higher risk stocks have revived on Wall Street Europe has been reluctant to follow the American example. We should not be surprised. There is a widespread perception that there is no longer a catalyst for European out-performance since the ECB delivered its reflation package. Japan is the market that is attracting most attention at this time. We cannot expect to see significant adjustment in the forex market until the reversal in the US$ bond market is more apparent. We cannot expect to see the Euro below the crucial threshold of US$ 1.3470-1.35 until we see the yield of the 10-year T-note trade above 2.65-2.70%. Consequently, the bias is to larger caps, to value and to defensive themes, even in a rising market. In particular, the universe of low growth, low risk, large cap value is enjoying a positive reassessment among investors. Investors are reluctant to return to the smaller cap universe.

We point out that the European context is comparable in many respects with the effects of German reunification almost 25 years ago. The next major stage in the story should be dominated by the upward adjustment of US$ interest rates. From this perspective equity markets seem to be aware that it is quarter to midnight.

Weightings and asset allocation for the MSCI Europe Universe



20/06/2014 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 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)
  1.03    
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