Emblematic Ukraine

  • According to our definitions, “the money has stayed in equities”. We are assuming that the bull market in trans-Atlantic equity has resumed. The US market has demonstrated its resilience. Our perception is that the flight to security within Europe’s financial markets has reached its climax.
  • It is not equity as an asset class that has been in difficulty. Our diagnosis is that a de-rating of global cyclical growth has begun, which reflects a profitability return-to-mean. The other influential theme is that of Europe’s vulnerability. The conflict in the Ukraine emphasises the leadership crisis in the region.

Recommended sector and market asset allocation

According to our definitions, “the money has stayed in equities”. We are assuming that the bull market in trans-Atlantic equity has resumed. The US market has demonstrated its resilience. The pull-back has been of the 3-5% variety established by recent precedent. The buyers were waiting at the 1900 area on the S&P500. There appear to be few good reasons for funds to exit the US equity market at this time. The risk of capitulation selling has only really applied to the markets of the euro zone. The 3000 level on the DJ EuroStoxx 50 has proved to mark the frontier at which the selling exhausted itself. Although there is no definitive resolution of the conflict with Russia over the Ukraine in sight we have always assumed that the Putin regime will not cross the threshold of evident military engagement. On this assumption, our perception is that the flight to security within Europe’s financial markets has reached its climax. The next phase for European equity that we expect to unfold through September is recovery led by a relief rally of growth stocks.

It is not equity as an asset class that has been in difficulty. In both America and Europe it is the more internationally-exposed industrial and consumer cyclical segments of equity that are in trouble. Our diagnosis is that a de-rating of global cyclical growth has begun, which reflects a profitability return-to-mean. Europe is especially vulnerable because the value universe is not strong enough to compensate for the weakness of the global growth category due to the persistence of deflationary forces within the region. By default, equity leadership so far this year has devolved to equity compartments that are virtual proxies for fixed income assets. The conflict in the Ukraine is emblematic of Europe’s vulnerability. It is not just that the conflict raises the premium for security. It emphasises the crisis of leadership within the region, within the euro system in particular.

Weightings and asset allocation for the MSCI Europe Universe



18/08/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 10.0 1.1 UW 9
Automobiles & Components 3.2 1.5 N 3
Consumer Durables & Apparel 2.4 1.1 UW 2
Consumer Services 0.9 0.9 OW 2
Media 2.1 0.9 UW 1
Retailing 1.4 0.9 UW 1
Consumer Staples 13.4 0.7 N 13
Food & Staples Retailing 1.3 1.0 UW 1
Fod Beverage & Tobacco 10.4 0.6 N 10
Household & Personal Product 1.7 0.7 OW 2
Energy 9.5 0.9 OW 11
Financials 22.4 1.3 OW 24
Banks 11.8 1.3 N 12
Diversified Financials 3.7 1.4 N 4
Insurance 5.8 1.2 N 7
Real Estate 1.1 0.9 OW 2
healthcare 12.9 0.7 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 6
Commercial Services & Suppy 1.3 0.8 UW 1
Transportation 1.4 1.0 OW 2
Information Technology 3.3 1.1 UW 2
Software & Services 1.5 0.9 UW 1
Technology & Hardware Equipment 1.0 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 0.9 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