Recommendations:
Asset Allocation — Overweight equities (3% above benchmark), Neutral cash, Underweight bonds (3% below benchmark). With valuations attractive, sentiment negative and fundamentals likely to improve, in our view, we have turned buyers of equities on August 13 for the first time since January 22, earlier this year.
Sectors — see European Model Portfolio in Exhibit 34. We are now overweight Healthcare (see Making Pharma Our Biggest Overweight, July 2, 2007), Tech & Telco, and Financials (see Financials: Very Contrarian, Decent Value, But Risks Are High, September 3, 2007). We are underweight Consumer-related areas as both the valuation and the outlook for these sectors in general is not good, we think. We are neutral Utilities, Materials, Energy and Industrials, but if our more bullish scenario plays out, Industrials, Materials and Energy should do well, while Healthcare and Telcos may not deserve an overweight in such a scenario.
Styles - Large caps. We believe that 2007 was the start of a multi-year trend of large cap outperformance. The valuation case for large caps is very good, the growth outlook is now quite similar to smaller caps, and the strategic M&A and liquidity phase we are likely to enter now should benefit large caps more, as is often the case in the last few years of a bull market (remember the Nifty Fifty, and TMT?). See Super Size Me: The Case For Large Caps In Detail, May 14, 2007.
Quantitative stocks screens. If we were on the buyside, we would invest maybe one third of our money in quantitative stock screens that we believe in.
Our four favourite such screens are:
1) Benjamin Graham Value Stocks — What Would Benjamin Graham Consider Buying Today? August 6, 2007;
2) Equity Carry stocks — Equity Carry: Financials & Telcos Dominate, August 28, 2007;
3) The Magic Formula / Joel Greenblatt-inspired long-short strategy– What The Magic Formula Advocates Today, August 2, 2007, and
4) Private Equity Screen — Updating Private Equity and 3Us Analysis, April 10, 2007.
And that’s it.
