>>> EUROPE
*The stars continue to align for Europe, but will it last?
2014 has begun much as 2013 left off. PMs are long stocks, long Europe and upbeat on growth. Net 41% are OW EU equity and net 34% plan to OW the region on 12m view. This isn’t surprising given that net 81% see a stronger EU economy in 2014; but it also suggests Europe may be vulnerable to any moderation in data.
*6% fear recession, 6% see EPS lower, 6% see EU as expensive
For the 2nd month running just 6% of PMs see risk of recession in Europe this year, the lowest since May-11. Improving sentiment is also driving the profit outlook; only 6% see EU earnings falling in 2014. At the same time just 6% think EU stocks are expensive; but 63% think they’re at fair value, the most since Sep-09. High cash levels and valuations likely support EU stocks – so long as earnings come through.
*Yet net 41% still see consensus earnings outlook as too high
For all PMs’ apparent exuberance, net 41% still view consensus EPS expectations for Europe as too high. PMs are evenly split on double digit EPS growth with net 3% seeing it plausible. Earnings outlook clearly remains a subject for debate; with 4Q13 earnings season looming the consensus OW in EU is vulnerable to disappointment.
*Pro-cyclical sector bias at risk if data or earnings fall short
Cyclical/Defensive positioning is 1 St. Dev. above average but just beginning to dip. Tech, Insurance, Autos and Industrials are the most loved sectors in Jan-14, but other high beta sectors slipped this month: weighting in Banks, Basics and Chems fell 16, 17 and 22 pts respectively. In January contrarians would buy EU energy and basics vs. selling EU Travel and Autos; EU stocks also screen as a contrarian sell.
>>> GLOBAL
*Your contrarian takeaways
1. Stay long stocks...until corporations reduce high cash levels, investors will run high cash levels & equity corrections will be extremely limited.
2. EM capitulation close...rarely have such bullish growth expectations mixed with such bleak EM weightings.
3. Buy some Staples as hedge...gap between investors long banks & short staples now widest in 10 years.
*How you learnt to stop worrying...
...and love the macro. Investor global growth & profit expectations at 3-year highs (despite sharp drop in China growth optimism). But investor frustration with corporate sector evident: record 58% want corporate cash spent on capex; record 67% say companies "under-investing".