* Submerging Markets…
We stick with our underweight of Global Emerging Markets in a Global Equity Portfolio.
We have moved to the fast-paced stage of the sell-off in Emerging Market assets and
Central Banks have begun to step in - such as the Central Bank of Turkey's emergency
rate hike. This makes for volatile markets and risks of whipsaw moves - the worse it
gets, the more likely a dramatic policy response will emerge. But we would wait before
adding to EM positions, as much of the fundamental backdrop has yet to improve. We
need to see signs of FX and equity volatility subsiding, before turning more Bullish.
* Valuations in EM: Mind the Gap
The headline 12mth forward P/E multiple for Emerging Markets is now sub-10x (9.8x as
of this writing). But the headline number hides a big gap between the winners and the
losers: the dispersion between the high and low P/E stocks in EM is the widest we've
seen since the Tech bubble. Meanwhile, the correlation between Emerging Markets
and Developed markets is close to decade lows, reflecting EM's markedly weaker macro
trends and earnings momentum. Fundamental weakness appears likely to persist in EM,
so we expect continued de-coupling (see page 3 for more detail).
* Bullish on Europe-ex-UK and Japan
We stay Overweight Europe ex-UK on our expectations for an improvement in
depressed earnings and margins. We upgraded Japan to Small Overweight on January
21, as it had given up close to half its "Abenomics" outperformance, and we see
escalation of QE by the BoJ. We downgraded the UK to Small Underweight: the UK
economy is moving out of the policy "sweet spot," and political risk is on the rise.
* Global Portfolios: What's driven out/underperformance so far in 2014?
The most important drivers of positive relative performance year to date have been US
Healthcare, US Tech, and Eurozone Financials. The biggest drags on portfolios have
included a few lagging US sectors (e.g. Cons Discretionary & Energy) but also Chinese
Financials (see full table of global relative performance drivers on page 12).