European Equities Sector Allocation Model Introduction

Hi,

I am working on a sector allocation model. These are the results for the 16/10/2009.

The following is based on the following macro inputs: US 10Y, GDP and inflation expectations. Sectors are ranked by valuation and momentum.


I have computed it for the Eurozone index (MSER).

Despite bond yields rolling over (negative for financials and cyclicals), higher growth and inflation expectations keep telling us that cyclicals sectors ought to be overweighted.

Interestingly, the financials look overbought on a 3 months basis.

I want to be clever so I will change some of the indications.

- The energy sector goes to UW. Seasonality plays there: this sector underperforms usually in Q4 (except the last 2 years!).

- I take some money out of financials after the 3M strong run. They go to neutral

- I upgrade telecoms to OW. They are seasonaly strong in Q4. Some results have been decent but i have little conviction

- Pharma goes to Neutral against the screen. The sector is sensitive to the dollar and at the current exchange rate, there could be a bounce. The $ is a crowded trade.

Next month, we'll have a closer look at Consumer Discretionary which may start to underperform in the run-up to Christmas. The sector valuation is quite high compared to history.

I am a taker of suggestions on how to incorporate other data. In particular, I may have a look at leading indicators such as the ISM.

Regards,

Julien