Second Chance

  • Our interpretation is that the acceleration of the behaviour of financial markets since the beginning of the year announces the re-acceleration of growth in nominal terms in the developed world from this time.
  • We explain why the ECB’s QE may produce a positive surprise. We may be under-estimating the scale of reallocation of funds within the euro system. We are witnessing a rapid resurgence of EZ narrow money aggregates. The recovery of the depressed profitability of EZ equity since the watershed of 2011-2012 remains intact.
  • We are moving our position in the Italian market from N to OW. The triple shock from currency, credit and energy prices provides an exceptional context for Italy this year.

Recommended sector and market asset allocation

The acceleration of the behaviour of financial markets since the beginning of the year announces a shift in the global investment climate. Our interpretation is that growth in nominal terms in the developed world should begin to re-accelerate from this time. In most economies the re-acceleration will doubtless be more apparent for overall rates of inflation than for real variables. The ECB’s QE is only a part of the story. Since the GFC the effects of non-orthodox monetary policy have tended to be over-estimated whereas the influence of the rebalancing of the global US$ bloc has been under-estimated. However, it may be that the ECB’s QE will produce a positive surprise, if only because investor perceptions of its effectiveness have been modest. EZ-QE should operate to the benefit of the over-indebted economies of the EZ periphery. Moreover, we may be under-estimating the scale of reallocation of funds resulting from the extension of negative interest rates in the EZ. We are witnessing a rapid resurgence of EZ narrow money aggregates. Growth of all the major EZ monetary aggregates should surpass that of their US equivalents this year. The recovery of the depressed profitability of EZ equity since the watershed of 2011-2012 remains intact. On the other hand, the behaviour of monetary indicators in large parts of the emerging world is not reassuring, even though interest rates are being reduced in most of these economies. There is no evidence that the relative profitability of emerging equity has completed its return-to-mean.

We are not expecting the S&P500 to be able to move above the 2150-2170 area this month. Consolidation is due in Europe’s markets now. However, the momentum in European equity is strong: we cannot count upon any significant degree of price correction in current circumstances. We have one change to make to our recommended portfolio. We are moving our position in the Italian market from N to OW. The triple shock from currency, credit and energy prices provides an exceptional context for Italy this year. Italian equity is still trading at a valuation discount to the European norm: we expect to see its valuation return-to-mean this year.

Weightings and asset allocation for the MSCI Europe Universe



02/03/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 11.1 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 1.5 0.9 OW 2
Consumer Staples 14.0 0.8 UW 12
Food & Staples Retailing 1.3 1.1 OW 2
Fod Beverage & Tobacco 10.8 0.8 UW 9
Household & Personal Product 1.9 0.7 N
2
Energy 7.5 1.1 N 8
Financials 22.3 1.2 N 22
Banks 11.7 1.2 N 12
Diversified Financials 3.2 1.2 N 3
Insurance 6.1 1.1 N 6
Real Estate 1.4 0.9 N 1
healthcare 13.6 0.8 N 13
Healthcare Equipment & Services 1.3 0.7 N 1
Pharmaceuticals & Biotechnology 12.3 0.8 N 12
Industrials 11.2 1.1 OW 12
Capital Goods 8.5 1.1 N 8
Commercial Services & Suppy 1.3 0.9 OW 2
Transportation 1.5 1.0 OW 2
Information Technology 3.5 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 7.7 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