Active Revival (the global break-out)

  • The global US$ value of equity assets has broken through the defensive frontier that has been defined since mid-2014 thanks to renewed multiple expansion and the return of smaller cap out-performance. February has brought clear evidence that the phase of defensive leadership in trans- Atlantic markets is complete. Market breadth is increasing. Active fund management should benefit.
  • European equity has registered its strongest start to an investment year since 1997. However, at this point we think that a phase of consolidation is due for trans-Atlantic equity, probably associated with renewed weakness in the oil-commodity space. We suspect it will be brief. No change to our portfolio.

Recommended sector and market asset allocation

January marked the resumption of the bull market in European equity. In February the message has gone global. The broadest definitions of the world-wide US$ value of equity assets have broken through the defensive frontier they have defined since mid- 2014 thanks to renewed multiple expansion and the return of out-performance by smaller caps. The month has brought clear evidence that the phase of defensive leadership in trans-Atlantic markets that goes back to the spring of last year is complete.

We argue that the climax of the oil price collapse at the end of January represents a watershed. From that time deflation anxiety has begun to recede, allowing the positive effects of commodity deflation in the consuming world to become predominant relative to the negative adjustment effects in the producer sphere. Inflation expectations have stabilised. The most powerful message in this respect is the fall in the price of high quality duration which is most apparent in the market for US Treasuries. A recovery of profit growth is expected, and perhaps its extension through time. In America it would seem that apprehension about the Federal Reserve’s intentions is declining. Precedent indicates that such market messages are reliable leading indicators of change in the economic environment. The paradox is that the data for activity and earnings in the USA have signalled a moderation of growth. However, the message concerns the nature of growth rather than the overall rate of expansion world-wide. The contribution to corporate profitability of the global growth theme is declining. The contribution of regional and domestic growth is rising. Growth should improve where it is most required, for incomes in the debt-constrained household sector of the trans-Atlantic economies. To this extent the redistribution of world growth should reduce the perception of investment risk.

European equity has registered its strongest start to an investment year since 1997. However, at this point we think that a phase of consolidation is due for trans-Atlantic equity, probably associated with renewed weakness in the oil-commodity space. We suspect it will be relatively brief. Our focus is stocks rather than equity indices. Market breadth is increasing. Active fund management should benefit. No change to our portfolio.

Weightings and asset allocation for the MSCI Europe Universe



23/02/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 11.2 1.1 OW 15
Automobiles & Components 3.7 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 1.5 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 7.6 1.1 N 8
Financials 22.5 1.2 N (UW) 22
Banks 11.8 1.2 N (UW) 12
Diversified Financials 3.2 1.2 N (UW) 3
Insurance 6.1 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 11.3 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 5.2 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