Emerging Markets continue to be overweighted. Although Emerging Asia continues to be underweighted, we have increased our weight in Taiwan
We have increased our weight in Taiwan to an overweight with reasonable valuations, stable GDP forecasts, and low beta risk. We have increased Malaysia’s weight to an overweight with upward revisions to 2022 GDP forecasts and low beta risk. We continue to overweight Indonesia with upward revisions to earnings forecasts and strong 12-month price momentum. On the other hand, China continues to be underweighted – with a downward trend to 2022 GDP forecasts, high beta risk relative to MSCI ACWI, and weak 12-month price momentum. South Korea continues to be underweighted with weakness in growth and very poor 12-month price momentum. India is underweighted based on expensive valuations and further downward revisions to 2022 GDP forecasts. We continue to overweight Emerging Europe/Middle East/Africa but have pared back South Africa. This month, we have pared back South Africa to marketweight. South Africa has reasonable valuations but substantial downward revisions to 2022 earnings forecasts and now negative terms-of-trade trend (export prices relative to import prices over the last 18 months). Turkey remains overweighted based on very inexpensive valuations and a vastly undervalued exchange rate. However, high risks remain with wide sovereign risk spreads. Latin America remains overweighted. Brazil, Chile, and Colombia remain overweighted. They are inexpensive markets. However, terms-of-trade for Brazil and Chile has turned more negative with the recent fall in some commodity prices. Colombia’s terms-of-trade continues to be attractive as a large oil exporter where prices have not fallen as much in the last several months. Mexico remains underweighted downward revisions to 2022 GDP forecasts.
In North America, U.S. continues to be underweighted, and Canada has become underweighted
The U.S. continues to be expensive relative to other markets. In addition, U.S.$ is overvalued and 2022 GDP forecasts have been revised downward 180bp in the last 6 months. We have reduced our weight in Canada. Terms-of-trade trend has gotten weaker, C$ is marginally overvalued, and short-term interest rates relative to their 2-year average have risen substantially.
Continental Europe remains mixed
Despite some weakness in the price of oil over the last 2 months, Norway continues to be overweighted with attractive terms-of-trade trend, inexpensive valuations, and strong 12-month price momentum. Italy and Austria continue to be favored as inexpensive markets. However, in Italy, with both the energy and political crisis, sovereign risk spreads have widened substantially. Portugal has become overweighted with upgrades to 2022 GDP forecasts over the last 6 months. Spain remains marketweighted with reasonable valuations and downward trending domestic credit growth/GDP.
Israel is now overweighted with attractive valuations and upgrades to forecasted 2022 GDP
Developed Asia has become underweighted
We decreased our overweight in Australia with weakened terms of trade trend. However, it remains one of the few markets without major downgrades to 2022 GDP forecasts over the last 6 months. Japan continues to be underweighted. GDP forecasts for 2022 have been downgraded by 130bp over the last 6 months, and terms-of-trade trend remains negative. Singapore and Hong continue to be underweighted. They are expensive markets with poor price momentum over last 12 months.
U.K is underweighted
The U.K has reasonable valuations, and price momentum over the last 12 months has continued to improve. However, forecasted GDP for 2022 continues to be revised downward.