Frankenstein

  • We doubt that the recovery of equity values from the panic of mid- October is yet complete, although it will be more tedious from this point. Leading US indices could return towards their highs of September over the next couple of weeks. “Sell the rally”. We expect more trouble ahead.
  • The disturbance concerns the price regime rather than the growth regime. The context of super-low, sub-2% inflation in the major economies has no recent precedent. Long-term inflation expectations are weakening. Largely as a consequence, America’s monetary transition has become controversial. The recognition of deflation risk in the EZ has produced the disintegration of the policy consensus under German leadership. Policy re-formulation will take time.

Recommended sector and market asset allocation

We doubt that the recovery of equity values from the panic of mid-October is yet complete, although it will certainly be more tedious from this point. Leading US equity indices could return towards their highs of September over the next two-three weeks. However, this movement is the opportunity to take profits and close this difficult investment year. We would expect the DJ ES50 to rally to the 3100-3150 area; we doubt it can go much further at this time. “Sell the rally”. We expect more trouble ahead.

We reiterate our diagnosis. The disturbance concerns the price regime rather than the growth regime. Our world has no recent experience of a context of persistently super-low, sub-2% inflation in the major economies. The implications for the growth of real incomes and real output are ambiguous. We would expect “global growth” to be slightly stronger in 2015 than in 2014. We are less sure that growth in nominal terms will be stronger. We do not think that the euro zone is moving back into recession. The debate concerns the dysfunctional effects of exceedingly low inflation and excessively low nominal growth. The uncertainty about the price regime creates two zones of controversy. America’s monetary transition has become controversial, largely due to the weakening of inflation expectations. We doubt that visibility about the post-QE3 monetary environment will return before the spring. The recognition of deflation risk in the EZ has produced the disintegration of the consensus about economic policy under German leadership. Policy re-formulation will take time. Germany is feeling aggrieved. The new element is the movement in the French political landscape. The current context in the European equity space is reminiscent of this same period in 2011, without the financial crisis.

Weightings and asset allocation for the MSCI Europe Universe



27/10/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocatioln (%)
Consumer Discretionary 9.9 1.1 UW 9
Automobiles & Components 3.1 1.4 N 3
Consumer Durables & Apparel 2.4 1.0 UW 1
Consumer Services 1.0 1.0 OW 2
Media 2.1 0.9 N 2
Retailing 1.4 0.9 UW 1
Consumer Staples 13.3 0.7 OW 14
Food & Staples Retailing 1.1 1.0 UW 0
Fod Beverage & Tobacco 10.5 0.7 OW 12
Household & Personal Product 1.7 0.7 OW 2
Energy 8.8 1.0 N 9
Financials 23.2 1.2 OW 25
Banks 13.0 1.3 N 13
Diversified Financials 3.1 1.3 N 3
Insurance 5.9 1.1 OW 7
Real Estate 1.2 0.9 OW 2
healthcare 13.9 0.8 OW 16
Healthcare Equipment & Services 1.2 0.7 OW 2
Pharmaceuticals & Biotechnology 12.6 0.8 OW 14
Industrials 10.8 1.1 UW 8
Capital Goods 8.2 1.1 UW 5
Commercial Services & Suppy 1.2 0.8 UW 1
Transportation 1.5 1.1 OW 2
Information Technology 3.2 1.1 OW 4
Software & Services 1.4 0.9 UW 1
Technology & Hardware Equipment 1.0 1.4 OW 2
Semiconducors 0.8 1.1 OW 1
Materials 7.6 1.1 N 7
Telecommunication services 5.0 0.9 N 5
Utilities 4.3 0.8 N 4
Exposure to risk
(beta value)
  1.00    
Lquidity ratio   6%    
* 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