Reshaping : Part II

  • We are completing the reshaping of our portfolio, reducing exposure to defensive, large cap growth to the benefit of higher risk, cyclical growth and value. In particular, we have two signals to remove our UW in Europe’s Banks. The first is the stabilisation of inflation expectations that is directly associated with the end of the collapse of the price of crude oil. The second is our understanding that the EZ’s growth-and-credit surprise has commenced.
  • The counterpart is a move to UW in Consumer Staples. Commodities and fixed income have signalled the reversal of the upward movement of the relative valuation of secure growth stocks of this type.
  • The implications of the changes to our sector allocation for our allocation by market have become significant. We are downgrading the two markets within Europe with highest relative exposure to secure, non-commodity, non-cyclical growth. Switzerland and Denmark move from N to UW. We are upgrading three markets more exposed to higher risk, cyclical growth and value; Germany, France and Sweden.

Recommended sector and market asset allocation

Last week we reallocated about 5% of our recommended portfolio, reducing exposure to defensive, large cap growth to the benefit of higher risk, cyclical growth and value. Smaller cap leadership is returning. We are completing the portfolio reshaping this week, prolonging the same logic.

We have received two signals this month that indicate it is time to remove our UW position in Europe’s Banks. The first is the stabilisation of inflation expectations that is directly associated with the end of the collapse of the price of crude oil. The pronounced out-performance of the bond proxies relative to the Banks has come to an end. We are therefore removing our OW position in the small sector of Real Estate. The second signal is our understanding that the EZ’s growth surprise has commenced. The consensus forecasts for activity in the EZ are beginning to move upwards. The surprise of credit expansion has also begun. Europe’s growth-and-credit surprise is essential for Europe’s banks for which the improvement of profitability depends crucially upon the extent to which loans replace secure debt in balance sheets over the next couple of years. Europe’s banks offer access to an asset class represented by SME and household loans whose yield is comparatively high at a funding cost that is still declining in many cases. The counterpart is a move to UW in Consumer Staples, by downgrading the largest compartment of F&B from N to UW and the smaller category of Personal & Household from OW to N. Commodities and fixed income have signalled the reversal of the upward movement of the relative valuation of secure growth stocks of this type, suggesting that we should reduce the scale of our over-weight position in the consumer universe. We are also removing our UW position in the Capital Goods sector, in part due to the extension of currency devaluation to the Nordic region.

The implications of the changes to our sector asset allocation for our asset allocation by market have become significant. Consequently, we are downgrading the two markets within Europe with highest relative exposure to secure, non-commodity, non-cyclical growth. Switzerland and Denmark move from N to UW. We are upgrading three markets more exposed to higher risk, cyclical growth and value; Germany, France and Sweden.

Weightings and asset allocation for the MSCI Europe Universe



16/02/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 11.0 1.1 OW 15
Automobiles & Components 3.6 1.4 OW 5
Consumer Durables & Apparel 2.6 1.0 N 3
Consumer Services 1.1 1.0 OW 2
Media 2.3 0.9 OW 4
Retailing 1.4 0.9 OW 2
Consumer Staples 13.7 0.8 UW (OW) 12
Food & Staples Retailing 1.3 1.1 OW 2
Fod Beverage & Tobacco 10.6 0.8 UW (N) 9
Household & Personal Product 1.8 0.7 N (OW) 2
Energy 7.8 1.1 N 8
Financials 22.4 1.2 N (UW) 22
Banks 11.6 1.2 N (UW) 12
Diversified Financials 3.1 1.2 N (UW) 3
Insurance 6.2 1.1 N 6
Real Estate 1.4 0.9 N (OW) 1
healthcare 13.5 0.8 N (OW) 13
Healthcare Equipment & Services 1.2 0.7 N (OW) 1
Pharmaceuticals & Biotechnology 12.3 0.8 N 12
Industrials 11.2 1.1 OW (N) 12
Capital Goods 8.5 1.1 N (UW) 8
Commercial Services & Suppy 1.3 0.9 OW 2
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 7.8 1.1 N 8
Telecommunication services 5.3 1.0 OW 6
Utilities 3.9 0.8 UW 1
Exposure to risk
(beta value)
  1.02    
Lquidity ratio   3%    
* 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