Middle Earth

  • The trend reversal throughout the US$ debt-credit space corresponds to the end of private sector deleveraging in America. The message is fundamentally reassuring but implies consolidation on Wall Street from a tactical perspective.
  • Investor capitulation has extended from commodities to emerging markets. The new focus of investment risk for the consensus is the periphery of the global US$ zone rather than the centre.
  • We explain why European equity is a beneficiary of the realignment of the investment consensus. Europe’s markets could still go higher into the summer. We remain fully invested with our balanced portfolio.

Recommended sector and market asset allocation

In our last note we claimed that the recent pullback in transAtlantic equity markets was complete. There has been investor repositioning but not investor panic. Our interpretation is that we have been witnessing trend reversal throughout the US$ debtcredit space which corresponds to the end of private sector deleveraging in America. To this extent, the message from debt markets is fundamentally reassuring. However, from a tactical perspective our understanding is that the US equity market has entered a period of consolidation because the signals from debt suggest that the recent phase of multiple expansion should be complete. We expect the S&P500 to trade between 15801600 and the 1700 level for some time.

Another counterpart of the reversal of trend in US$ debt markets is the displacement of the perception of investment risk from West to East. Investor capitulation has extended from commodities to emerging markets. The new focus of investment risk for the consensus is the periphery of the global US$ zone rather than the centre. However, the risks in the emerging world have been present for some time.

We explain in this note why European equity could emerge as a beneficiary of the realignment of the investment consensus that has been taking place. Among the lowervalued alternatives to America, Europe has become the favourite. First, it is plausible to think that European economic data can deliver more positive surprises than those from America because the gap in relative expectations has become so wide. Second, Europe should not have to confront the question of the removal of monetary stimulus for a very long time. Third, the disturbances in emerging markets have drawn attention to the argument that Europe’s competitiveness is improving. Europe’s markets could still go higher into the summer. We remain fully invested with our balanced portfolio.

Weightings and asset allocation for the MSCI Europe Universe



14/06/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.5 1.1 OW 14
Automobiles & Components 2.8 1.5 OW 4
Consumer Durables & Apparel 2.4 1.1 OW 3
Consumer Services 0.9 0.9 OW 2
Media 1.8 0.8 OW 3
Retailing 1.5 0.8 OW 2
Consumer Staples 14.6 0.5 OW 16
Food & Staples Retailing 1.6 0.7 OW 2
Fod Beverage & Tobacco 11.2 0.5 OW 12
Household & Personal Product 1.8 0.6 OW 2
Energy 9.8 1.0 N 10
Financials 21.0 1.5 OW 22
Banks 10.7 1.5 OW 12
Diversified Financials 3.8 1.6 N 4
Insurance 5.6 1.4 N 6
Real Estate 1.0 1.0 N 1
healthcare 13.0 0.6 UW 10
Healthcare Equipment & Services 1.2 0.5 UW 1
Pharmaceuticals & Biotechnology 11.7 0.6 UW 9
Industrials 11.3 1.2 UW 10
Capital Goods 8.8 1.2 UW 8
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.0 UW 1
Information Technology 3.1 1.0 OW 4
Software & Services 1.5 0.9 OW 2
Technology & Hardware Equipment 0.8 1.2 OW 1
Semiconducors 0.8 1.1 OW 1
Materials 8.2 1.3 OW 10
Telecommunication services 5.4 0.7 UW 3
Utilities 4.1 0.9 UW 2
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