We have reduced exposure to Asia (primarily Emerging Asia) in the Global Equity strategy and allocated the proceeds across our U.S. large-cap sector exposures. We see the outlook for our favored U.S. sectors as more attractive than the opportunities in Emerging Asia, given dimming economic prospects and more normalized valuations for that overseas market segment. Trade tensions between the U.S. and China remain a significant headwind for the Emerging Asian economies, and we believe the potential for a broad resolution to these tensions has diminished. The most likely scenario, in our view, is a limited deal that is unlikely to reverse the economic headwinds that have been set in motion, particularly in Emerging Asia, as businesses have adjusted their investment plans in the face of long-term trade uncertainty and a more mature Chinese economy. Meanwhile, valuations of Emerging Asian equities have risen this year, reducing the attractiveness of the risk/reward trade-off in the region relative to our favored U.S. sector exposures.
Reduction of Asia ex-Japan Allocation: We had increased our exposure to Asia ex-Japan in Q3 2018. At the time, Emerging Asia equities traded at very low valuations, which we viewed as attractive given that a large proportion of Emerging Asia is comprised of high-growth Information Technology, Communication Services and Consumer Discretionary firms. Since reaching a trough in December 2018, we have witnessed Emerging Asia valuations expand to more normal levels (both with respect to EM Asia’s historical valuations and relative to global developed-market equity valuations). Over that same time period, the economic impact of tariffs and trade uncertainty has weighed on Emerging Asia economies as well as the earnings power of Emerging Asia equities. We see those impacts continuing given the tariffs in place today and a likely-limited deal going forward.
Add to Existing U.S. Allocations: While the U.S. economic expansion continues to mature, the consumer remains a source of relative strength that should support continued expansion. Selective U.S. sectors are positioned well for moderate economic growth. For example, Consumer Discretionary and Consumer Staples Sectors provide balanced exposure to the U.S. consumer. The Communication Services Sector is benefiting from secular shifts toward digital advertising and media consumption, as well as a technology cycle upgrade to 5G wireless networks. Information Technology companies should benefit as businesses are likely to continue investing in enterprise technology CapEx to improve productivity and expand margins in an extended moderate economic growth environment. Health Care can provide stable and outsized earnings growth in this type of environment, and leading biotech and pharma companies have robust pipelines that can fuel acceleration in earnings growth. The Utilities Sector provides a source of relative earnings and stock price stability as economic growth shows signs of modest deceleration and equity market volatility has increased.