Double bottom

  • We expect European equity to perform better relative to America in this year’s second half, allowing the region’s markets to return in this quarter to their best levels of May. Both domestic and external influences are becoming more favourable.
  • Global consumer assets continue to deliver out-performance. The valuation premium of consumer stocks can still be maintained. The profit-valuation trade-off is most attractive for Europe’s Discretionary segment which is our designated leader of the current investment cycle.

Recommended sector and market asset allocation

The first half of 2013 has been rather frustrating for the investor in European equity. We expect European equity to perform better relative to America in this year’s second half, allowing the region’s markets to return in this quarter to their best levels of May. Both domestic and external influences are becoming more favourable.

In America the June payrolls report has cemented in place the expectation that the Fed will begin to reduce the scale of its asset purchases from September. With “tapering” from September now the consensus we do not expect Treasury yields to continue to rise. Our perception is that the adjustment in US$ debt markets to the expectation of the gradual withdrawal of QE3 is essentially complete.

The domestic influences within Europe are captured by the barometer that is the behaviour of financials, and Europe’s banks in particular. Their risk-reward profile at the beginning of this year’s second half is attractive. The region is emerging from recession without upside risk attached to money market rates through to 2015. Moreover, we also expect this month of July to bring confirmation that the long period of chronic under-performance of the numerous stocks in Europe sensitive to the commodity-emerging space is at an end.

Global consumer assets continue to deliver out-performance. Their relative out-performance is most pronounced within emerging markets, reflecting the structural displacement of profitability in these countries. In this respect, China anxiety does not relate to Chinese consumer. Consumers in the high income economies have also begun to contribute to the theme of the global consumer. We argue that the valuation premium of the consumer universe of stocks will not decline unless and until there are signs that their profit leadership is fading. Our recommended portfolio is constrained to keep at least a 30% exposure to the combined sectors of Consumer Staples and Discretionary in recognition of the power of the leadership of the global consumer theme. The profit-valuation trade-off is most attractive for the Discretionary segment which is our designated leader of the current investment cycle.

Weightings and asset allocation for the MSCI Europe Universe



28/06/2013 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 9.6 1.1 OW 15
Automobiles & Components 2.8 1.6 OW 4
Consumer Durables & Apparel 2.6 1.2 OW 3
Consumer Services 1.0 0.9 OW 2
Media 1.9 0.8 OW 3
Retailing 1.3 0.9 OW 2
Consumer Staples 14.8 0.5 OW 16
Food & Staples Retailing 1.7 0.7 OW 2
Fod Beverage & Tobacco 11.3 0.5 OW 12
Household & Personal Product 1.9 0.6 OW 2
Energy 9.7 1.0 N 10
Financials 21.1 1.4 OW 22
Banks 10.6 1.5 OW 11
Diversified Financials 3.8 1.6 N 4
Insurance 5.6 1.4 N 6
Real Estate 1.0 1.0 N 1
healthcare 13.2 0.6 UW 10
Healthcare Equipment & Services 1.2 0.5 UW 1
Pharmaceuticals & Biotechnology 12.0 0.6 UW 9
Industrials 11.3 1.2 UW 10
Capital Goods 8.7 1.2 UW 8
Commercial Services & Suppy 1.4 0.8 N 1
Transportation 1.2 1.0 UW 1
Information Technology 3.2 1.0 OW 4
Software & Services 1.4 0.9 OW 2
Technology & Hardware Equipment 0.9 1.1 OW 1
Semiconducors 0.8 1.1 OW 1
Materials 7.7 1.3 OW 9
Telecommunication services 5.6 0.7 UW 3
Utilities 3.9 0.9 UW 2
Exposure to risk
(beta value)
  1.04    
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