The Mighty US$

  • The pullback on Wall Street has commenced. It should be the catalyst for consolidation in Europe’s markets. Any market pullback in Europe at this time should be brief. The rise in yields of longer duration Treasuries since end-January sends the signals we require.
  • The effects of the appreciation of the US$ can now be discerned in US economic data and in the behaviour of Wall Street. Although we suspect that the time of the long-awaited consolidation of the US$’s gains is arriving, at least relative to Europe, the US$ remains the emblem of the post-2008 investment cycle. The transition from weak to strong US$ since 2008 is the barometer of the displacement of investment risk from consumer assets to producer assets and from West to East.

Recommended sector and market asset allocation

The pullback on Wall Street has commenced. It should be the catalyst for consolidation in Europe’s markets, for which investors are prepared to judge by the recent fall-off in trading volumes and a somewhat more defensive bias in stock behaviour. It remains our perception that any market pullback in Europe at this time will be brief. The rise in yields of longer duration Treasuries since end-January sends the signals we require.

The effects of the appreciation of the US$ can now be discerned in US economic data and in the behaviour of Wall Street. The differential of economic activity surprises between the USA and the EZ has become more detrimental for America than at any time since Q2 2011. Excluding energy, net EPS revisions have become positive for EZ equity, for the first time since the beginning of 2011. However, they have become more negative for US equity than at any time since 2008. For these reasons, and because the growth-credit surprise in the EZ is just beginning to unfold, we suspect that the time of the longawaited consolidation of the US$’s gains is arriving, at least relative to Europe.

This said, the US$ remains the emblem of the post-2008 investment cycle. The transition from weak to strong US$ since 2008 is the barometer of the displacement of investment risk from consumer assets to producer assets and from West to East. The US$ is the most visible barometer of the shift in the locus of deflation in the world economy. It carries a powerful message of redistribution of global investment risk. The emergence of the strong US$ since last summer tells us that the war against deflation in domestic America is being won. It has accentuated the vulnerability of the commodity-emerging space: the European region is the principal beneficiary. It is not coincidental that the growth of employment and of household real incomes in the USA has accelerated since that time. The reference to 1997 suggests that we might be under-estimating the scale of the returns from European equity this year that will be produced by the exceptional circumstances of the ECB’s QE in the context of the currency, credit and oil triple shock. If there is to be exuberance in Europe this year it will have to express itself as out-performance of America.

Weightings and asset allocation for the MSCI Europe Universe



09/03/2014 Neutral weight in MSCI (%) 2-yr beta values
(vs MSCI)
Tactical sector rating Recommended allocation (%)
Consumer Discretionary 11.6 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 2.7 0.9 OW 4
Retailing 1.5 0.9 OW 2
Consumer Staples 14.1 0.8 UW 13
Food & Staples Retailing 1.3 1.1 OW 2
Fod Beverage & Tobacco 10.9 0.8 UW 9
Household & Personal Product 1.8 0.7 N
2
Energy 7.3 1.1 N 7
Financials 22.5 1.2 N 22
Banks 11.8 1.2 N 12
Diversified Financials 3.2 1.2 N 3
Insurance 6.2 1.1 N 6
Real Estate 1.4 0.9 N 1
healthcare 13.5 0.8 N 13
Healthcare Equipment & Services 1.2 0.7 N 1
Pharmaceuticals & Biotechnology 12.2 0.8 N 12
Industrials 11.2 1.1 OW 12
Capital Goods 8.4 1.1 N 8
Commercial Services & Suppy 1.3 0.9 OW 2
Transportation 1.6 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 1.0 1.1 OW 2
Materials 7.6 1.1 N 7
Telecommunication services 4.8 1.0 OW 6
Utilities 3.9 0.8 UW 1
Exposure to risk
(beta value)
  1.01    
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