Decision Time

  • We recognise the significance of the conflict in the Ukraine. The controversy concerns European equity, not its American counterpart. There is no good reason to change the “buy the pullback” playbook for US equity.
  • Our interpretation has not changed. Although we cannot expect a recovery of European equity to be sustained at this point we do not think that this is a time to sell European equity. We have confirmation of the “slow sink” of the Euro. The reporting season is providing support, notably for financials.
  • We cannot remove the defensive bias to our portfolio until the most secure bond markets begin to weaken. We are reinforcing the consumer universe through the P & H sector. For similar reasons we are upgrading the UK market at the expense of the EZ.

Recommended sector and market asset allocation

This is decision time for European equity. Deflation anxiety has been on the rise for some time. Over the last two weeks investors have been reminded about both credit risk and geopolitical risk. We recognise the significance of the conflict in the Ukraine. Its consequences are reduced commercial and financial ties between Russia and the West, the reassessment of European energy policy and the weakening of the Russian economy to the point of recession through 2015. The controversy concerns European equity, not its American counterpart. There is no good reason to change the “buy the pullback” playbook for US equity. The reporting season in America is sending familiar, reassuring signals. Our interpretation has not changed. We cannot expect a recovery of European equity to be sustained at this point. However, we do not think that this is a time to sell European equity. There have been no signs of panic in Europe’s markets. We have confirmation of the “slow sink” of the Euro against the US$. The reporting season is also providing support for financials. Inflation in the region is stabilising. The forex market should bring relief, albeit slowly. Earnings downgrades in the region should stabilise through the months ahead. America will tell us when to sell equity assets, not Europe. America is not yet ready for the sell sign.

We cannot remove the defensive bias to our recommended portfolio until the most secure bond markets begin to weaken. The category of European equity that should draw benefit from the current context is the consumer universe, both Staples and Discretionary. We are upgrading the Personal & Household sector to OW because profit leadership remains apparent here but its relative valuation has virtually completed its return to-mean. A similar logic applies to the UK market, at the expense of the euro zone. The UK also has relatively high exposure to the positive effects of a stronger US$. For similar reasons we are moving to over-weight from neutral in the globalconsumer Danish market to the expense of Finland.

Weightings and asset allocation for the MSCI Europe Universe



21/07/2014 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 3.3 1.5 OW 4
Consumer Durables & Apparel 2.5 1.1 OW 3
Consumer Services 0.9 0.9 OW 2
Media 2.0 0.9 UW 1
Retailing 1.3 0.9 UW 1
Consumer Staples 13.5 0.7 N (UW) 14
Food & Staples Retailing 1.4 1.0 UW 1
Fod Beverage & Tobacco 10.4 0.6 N 10
Household & Personal Product 1.7 0.7 OW (N) 3
Energy 9.6 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 5.8 1.2 N 6
Real Estate 1.1 0.9 OW 2
healthcare 12.9 0.8 N 13
Healthcare Equipment & Services 1.1 0.6 N 1
Pharmaceuticals & Biotechnology 11.8 0.8 N 12
Industrials 11.1 1.1 UW 9
Capital Goods 8.4 1.1 UW 7
Commercial Services & Suppy 1.2 0.8 UW 1
Transportation 1.4 1.0 OW 2
Information Technology 3.2 1.1 UW 2
Software & Services 1.5 0.9 UW 1
Technology & Hardware Equipment 0.9 1.3 UW 0
Semiconducors 0.8 1.2 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)
  1.00    
Lquidity ratio   2%    
* 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