Of Growth and Value

  • The perception amongst retail money that there is no real threat to US equity tells us that market risk is shifting to America. From this time we expect the profit-taking in the US equity space to gain the advantage over the momentum buyers.
  • Our argument is that it is too early for a recovery in European equity to be sustained. Our focus remains capital preservation. We are raising the Telecoms sector from N to OW and reducing the Insurance sector from OW to N.
  • We explain our interpretation that the change in the status of the US$ since the summer marks the third and final stage of the post-2008 bull markets in risk assets, led by America. It announces a change in growth leadership. The contribution to corporate profitability in the West from trade with the ex-booming emerging world is exhausted. The growth that will create more positive surprises from this time, beginning in America and then extending to Europe, will be more regional and domestic in nature.

Recommended sector and market asset allocation

The divergence between US and European equity remains very apparent. The perception amongst retail money that there is no real threat to US equity tells us that market risk is shifting to America. The US reporting season is coming to an end. Year-end is approaching. From this time we expect the profit-taking in the US equity space to gain the advantage over the momentum buyers. We doubt that we will see the S&P500 sustain a move above the 2050-60 level. However, the US stock market rarely experiences correction when it is most over-bought. It is plausible to think that major indices will remain close to their current levels for a week or two before a market setback becomes apparent.

Our argument is that it is too early for a market recovery to be sustained, that there will be better opportunities over the next few months if we are patient. We think that the effective ceiling for the DJ EuroStoxx50 index remains the 3100-3200 area at this time. We expect to see another rally fail in this zone. Our focus remains capital preservation. We are raising the Telecoms sector to OW from N and reducing the Insurance sector from OW to N. The reporting season has been encouraging for European Telecoms. Moreover, the sector’s valuation return-to-mean is not yet entirely complete. The Insurance sector is cheap, like all financials, but there are indications that its profit leadership is weakening. Our downgrade is a profittaking because we doubt that the pronounced out-performance of Insurers relative to Europe’s Banks since mid-year can be sustained.

We focus upon the message of the change in investors’ perception of the US$ in this week’s note. The stronger US$ since the summer has relaunched the deflationary return-to-mean of commodity values. The perception of over-supply is focused upon the price of crude oil at this time. Super-low inflation in the developed world is going to be very evident for some time. In nominal terms, growth cannot accelerate. However, the trade-off between prices and real variables is improving. There is no growth slowdown in prospect in the trans-Atlantic economies in real terms thanks to the anticipated improvement in household real incomes and spending. The context of excessively weak nominal growth but with exchange rate depreciation and modest improvement of real disposable incomes in most European economies favours out-performance by the growth style relative to the value style. Moreover, the emergence of a strong US$ announces a change in growth leadership. The disturbance of 2011 marked the fall of the first wave of the global growth theme. Commodities and emerging assets began their price return-to-mean. The current disturbance marks the fall of the second derivative of the global growth theme. The contribution to corporate profitability in the West from trade with the ex-booming emerging world is exhausted. The growth that will create more positive surprises from this time, beginning in America and then extending to Europe, will be more regional and domestic in nature. We will demonstrate the meaning of this interpretation in future notes.

Weightings and asset allocation for the MSCI Europe Universe



17/11/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 10.1 1.1 N 10
Automobiles & Components 3.1 1.4 N 3
Consumer Durables & Apparel 2.5 1.0 UW 1
Consumer Services 1.0 1.0 OW 2
Media 2.1 0.9 OW 3
Retailing 1.4 0.9 UW 1
Consumer Staples 13.8 0.7 OW 16
Food & Staples Retailing 1.2 1.0 UW 1
Fod Beverage & Tobacco 10.8 0.7 OW 13
Household & Personal Product 1.8 0.7 OW 2
Energy 8.5 1.0 N 8
Financials 22.6 1.2 UW 20
Banks 12.2 1.2 UW 10
Diversified Financials 3.2 1.3 UW 2
Insurance 6.0 1.1 N (OW) 6
Real Estate 1.2 0.9 OW 2
healthcare 13.7 0.8 OW 17
Healthcare Equipment & Services 1.2 0.7 OW 2
Pharmaceuticals & Biotechnology 12.5 0.8 OW 15
Industrials 11.0 1.1 UW 9
Capital Goods 8.3 1.1 UW 6
Commercial Services & Suppy 1.2 0.8 UW 1
Transportation 1.5 1.1 OW 2
Information Technology 3.3 1.1 OW 4
Software & Services 1.4 0.9 UW 1
Technology & Hardware Equipment 1.0 1.3 OW 2
Semiconducors 0.9 1.1 OW 1
Materials 7.6 1.1 OW (N) 6
Telecommunication services 5.1 0.9 N 6
Utilities 4.3 0.8 N 4
Exposure to risk
(beta value)
  0.98    
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