A strange kind of deflation

  • US equities have taken another step forward, validated by the acceleration of growth of employment. We can be more confident that equity returns this year will be concentrated in Q2 and Q3. We would remain “fully invested”. This week’s market pull-back is to be bought.
  • It is not paradoxical to defend a defensive bias to our asset allocation, at least until the conditions for stronger currency adjustment are in place. The under-performance of the universe of cyclical and financial stocks is a greater handicap for Europe than for America. The damage to the fixed income space is not yet decisive. Volatility in the fixed income space will only rise slowly.

Recommended sector and market asset allocation

It is not paradoxical to defend a defensive bias to our asset allocation, at least until the conditions for stronger currency adjustment are in place. The under-performance of the universe of cyclical and financial stocks is a greater handicap for Europe than for America. The damage to the fixed income space is not yet decisive. Volatility in the fixed income space will only rise slowly.

It is not paradoxical to defend a defensive bias to our asset allocation, at least until the conditions for stronger currency adjustment are in place. The under-performance of the universe of cyclical and financial stocks is a greater handicap for Europe than for America. Our interpretation is that this third quarter will mark the end of the collapse of the cost of debt in the euro zone. However, the damage to the fixed income space is not yet decisive. Volatility in the fixed income space will only rise slowly. We should not be surprised that the adjustment in bond and forex markets remains slow. The psychological break-through will come when the yield on the benchmark 10-year Treasury note trades above the resistance at the 2.65-2.70% level.

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 10.2 1.1 OW 11
Automobiles & Components 3.4 1.5 OW 4
Consumer Durables & Apparel 2.5 1.1 OW 3
Consumer Services 1.0 0.9 OW 2
Media 2.0 0.8 UW 1
Retailing 1.3 0.9 UW 1
Consumer Staples 13.3 0.7 UW 13
Food & Staples Retailing 1.4 1.0 UW 1
Fod Beverage & Tobacco 10.3 0.6 N 11
Household & Personal Product 1.7 0.7 N 2
Energy 9.8 0.9 OW 11
Financials 22.1 1.3 N 22
Banks 11.5 1.3 N 11
Diversified Financials 3.7 1.4 N 4
Insurance 5.7 1.2 N 6
Real Estate 1.1 0.9 OW 2
healthcare 12.8 0.8 N 13
Healthcare Equipment & Services 1.1 0.6 N 1
Pharmaceuticals & Biotechnology 11.7 0.8 N 12
Industrials 11.2 1.1 UW 9
Capital Goods 8.5 1.1 UW 7
Commercial Services & Suppy 1.3 0.8 UW 1
Transportation 1.5 1.0 OW 2
Information Technology 3.2 1.1 UW 2
Software & Services 1.4 0.9 UW 1
Technology & Hardware Equipment 0.9 1.3 UW 0
Semiconducors 0.8 1.1 UW 0
Materials 8.2 1.2 N 8
Telecommunication services 4.9 0.9 OW 6
Utilities 4.3 0.8 N 4
Exposure to risk
(beta value)
  0.99    
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