Great Expectations (the Consumer Decade)

  • The PBOC has signalled a more expansionary monetary policy, to the benefit of the property market, the consumer and equity assets in China. Mr Draghi has re-emphasised his primacy at the ECB. The predominant assumption is that GB-QE by the ECB is only a question of time. Europe’s markets are now confronted with the problem of great expectations. There has never been a majority at the ECB for a pre-emptive antideflation strategy. We do not think that the position has changed. Additionally, we have no reason to change our view of the US equity market. Last year profit-taking predominated after Thanksgiving. We think that it will probably be the same this year.
  • We reiterate our long-term interpretation of a “consumer decade”. We explain why the context has become more favourable for Europe’s Consumer Discretionary stocks. We are raising this sector from N to OW through the segments of Retailing and Durables-Apparel.

Recommended sector and market asset allocation

The PBOC has signalled a more expansionary monetary policy. The stimulus to lending will benefit the property market, the consumer and equity assets in China. The perception of “China risk” has diminished in respect of the immediate outlook for growth. It has not diminished as regards the sustainability of the credit expansion in China. At the same time Mr Draghi has re-emphasised his primacy at the ECB. Accordingly, the predominant assumption is that sovereign bond QE by the ECB is only a question of time. Europe’s markets are now confronted with the problem of great expectations. There has never been a majority at the ECB for a preemptive anti-deflation strategy. We do not think that the position has changed. Additionally, we have no reason to change our view of the US equity market. We have been saying that we do not expect the S&P500 to be able to sustain a move above the 2050-60 level. The stimulus of the reflation-outside-America theme means that we have to allow a small extension. Last year profit-taking predominated after Thanksgiving. We think that it will probably be the same this year, if only because so many are saying something much more bullish.

We reiterate our long-term interpretation of a “consumer decade”, which is the reciprocal of the profit return-to-mean of producer assets, commodity equity in particular, in the current investment cycle. We argue that the new price regime of super-low inflation is not as unfavourable for Consumer Discretionary stocks in developed markets as it may appear. First, the deflation risk at this time is more acute for producers of goods competing in global markets than for local providers of services. Second, the leadership of consumer assets in this decade implies a degree of valuation premium for consumer stocks. The valuation of Europe’s Consumer Discretionary sector has fallen back this year to a position of virtual valuation neutrality. We assume, therefore, that there is little further downside risk for the sector’s relative valuation. Third, Europe’s consumer discretionary stocks are behaving better in this quarter, following the example of their counterparts in America. Indicators of business for Retailers are stabilising thanks in large part to the improvement in real personal incomes resulting from falling prices of household necessities. Accordingly, we are moving the Consumer Discretionary Sector from N to OW by upgrading the lower risk compartment of Retailing to OW and the segment of Consumer Durables and Apparel to N. These changes lead us to remove our UW position in the diverse Retail sector of the DJ Stoxx universe, the worst sector performer year-to-date.

Weightings and asset allocation for the MSCI Europe Universe



24/11/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 10.2 1.1 OW(N) 12
Automobiles & Components 3.2 1.4 N 3
Consumer Durables & Apparel 2.5 1.0 N(UW) 2
Consumer Services 1.0 1.0 OW 2
Media 2.1 0.9 OW 3
Retailing 1.4 1.0 OW(UW) 2
Consumer Staples 13.6 0.8 OW 15
Food & Staples Retailing 1.2 1.0 UW 1
Fod Beverage & Tobacco 10.7 0.7 OW 12
Household & Personal Product 1.7 0.7 OW 2
Energy 8.7 1.0 N 9
Financials 22.4 1.2 UW 20
Banks 12.1 1.2 UW 10
Diversified Financials 3.1 1.3 UW 2
Insurance 6.0 1.1 N 6
Real Estate 1.2 0.9 OW 2
healthcare 13.7 0.8 OW 16
Healthcare Equipment & Services 1.2 0.7 OW 2
Pharmaceuticals & Biotechnology 12.5 0.8 OW 14
Industrials 10.9 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 1.2 OW 1
Materials 7.7 1.1 OW 6
Telecommunication services 5.2 0.9 N 6
Utilities 4.2 0.8 N 4
Exposure to risk
(beta value)
  0.99    
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