Don’t Go Away

  • Our perception is that this first quarter will be the decisive period of this investment year. It is the period in which the effects upon inflation expectations of the change in the price regime and commodity shock are most pronounced whilst the positive effects upon growth are hardly apparent. Liquidity is not yet reflation.
  • January marked the end of the international under-performance of European equity. However, defensive investment strategies continue to out-perform world-wide. Accordingly, our recommended portfolio is defined by high exposure to bond proxies, high quality growth and the consumer universe and by low exposure to large cap value.
  • We are looking for a stabilisation of commodity values this month. We think that the collapse of crude oil prices has ended. Commodity stabilisation is positive. It is the pre-condition for the call that is doubtless the most significant of this entire investment year: the end of the collapse of yields of long-dated DM investment grade debt. We are reducing our portfolio liquidity ratio from 4% to 3%.

Recommended sector and market asset allocation

Our perception is that this first quarter will be the decisive period of this investment year. Central Banks outside America were the focus of investor attention in January. Thanks to the ECB the international under-performance of European equity came to an end. We do not expect EZ equity benchmarks to fall back below the break-out levels defined by the announcement of ECBQE on January 22nd. Accordingly, we are reducing the liquidity ratio of our recommended portfolio from 4% to 3%. However, outside Europe, global equity values have not registered improvement. Accordingly, defensive investment strategies have continued to out-perform world-wide. The premium for quality and for growth in European equity has continued to rise even though cyclical stocks are performing better thanks to currency depreciation. The out-performance of our recommended portfolio has been exceptional recently thanks to the strength of bond proxies, high quality growth and of the consumer universe and the weakness of large cap value. In particular, we have been witnessing a new phase of de-rating of Europe’s banks since last October. The return of a Greek risk is symptomatic of the change in the nature of the EZ’s crisis. A new risk premium has returned to the equity markets of the EZ periphery that is measured by the degree of government vulnerability rather than by debt spreads. Spain has become more vulnerable than Italy.

We think that the market movements of this month of February will probably be even more significant than those of January. We think that the short squeeze in oil futures signals the end of the collapse of crude oil prices. Do not be under-weight the Energy sector. We are looking for a stabilisation of commodity values this month. Once the perception of risk attached to commodities, oil in particular, begins to decline there will be less anxiety about default and financial stress within the commodity-emerging space, allowing better performance of assets in the emerging world. We also expect a phase of consolidation of the value of the US$ from this month. We assume that the US$1.11 value that was recorded for the Euro following the result of the Greek election marks an intermediary bottom. Commodity stabilisation is the pre-condition for the call that is doubtless the most significant of this entire investment year: the end of the collapse of yields of long-dated investment grade debt in the major economies.

Weightings and asset allocation for the MSCI Europe Universe



02/02/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 10.9 1.1 OW 14
Automobiles & Components 3.5 1.4 OW 5
Consumer Durables & Apparel 2.5 1.0 N 2
Consumer Services 1.2 1.0 OW 2
Media 2.3 0.9 OW 4
Retailing 1.5 0.9 OW 2
Consumer Staples 14.3 0.8 OW 18
Food & Staples Retailing 1.3 1.1 OW 2
Fod Beverage & Tobacco 11.2 0.8 OW 13
Household & Personal Product 1.9 0.7 OW 3
Energy 7.4 1.1 N 8
Financials 22.0 1.2 UW 17
Banks 11.3 1.2 UW 7
Diversified Financials 3.1 1.2 UW 2
Insurance 6.3 1.1 N 6
Real Estate 1.4 0.9 OW 3
healthcare 13.8 0.8 OW 16
Healthcare Equipment & Services 1.3 0.7 OW 2
Pharmaceuticals & Biotechnology 12.5 0.8 OW 14
Industrials 11.1 1.1 N 11
Capital Goods 8.3 1.1 UW 7
Commercial Services & Suppy 1.2 0.9 N 1
Transportation 1.5 1.0 OW 2
Information Technology 3.4 1.0 OW 4
Software & Services 1.5 0.9 UW 1
Technology & Hardware Equipment 1.0 1.2 OW 2
Semiconducors 0.9 1.1 OW 2
Materials 7.5 1.1 UW 6
Telecommunication services 5.3 1.0 OW 6
Utilities 4.2 0.9 UW 2
Exposure to risk
(beta value)
  0.99    
Lquidity ratio   3% (4%)    
* 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