Global Equity portfolio positioning intra-quarter update as of 11/12/2021
Continued to shift equity exposure from Asian emerging markets toward developed markets as economic cycle evolves
November 12, 2021
Actions and Overview:
Reduced Emerging Asia equity exposure
- Eliminated an Emerging Asia-focused ETF position
Increased developed market exposure in Asia and Europe
- Added to an existing developed Asia-focused ETF holding
- Added to an existing developed Europe ETF holding
Full Portfolio Rebalance
The global economic recovery continues to progress and, building on recent portfolio shifts, we continue to position portfolios for a transition from the very strong recovery phase to a more trend-like expansionary phase. As such, we are further decreasing overall emerging markets (EM) exposure, specifically reducing our EM Asia equity allocation, and adding to international developed markets in Asia and Europe due to a combination of macro and fundamental factors.
We typically have seen EM perform well during the early recovery stage of economic cycles, while developed markets have generally performed well during the mid-phase of economic cycles. Current fundamentals, in our view, suggest this relationship will hold in the current cycle. We also see potential that is particular to this cycle for elevated economic growth in Europe and Japan, where activity is poised to benefit from rising vaccination rates and re-opening trends following multiple waves of COVID-19 disruptions. In addition, developed markets should be supported by the higher level of fiscal and monetary policy accommodation implemented during the pandemic as compared to emerging markets. Meanwhile, in addition to the evolving economic cycle, we see various factors related to China, including regulation and expanded debt, as increasing risks for EM Asian equities.
Eliminated Emerging Asia-focused ETF position:
- As the global economic recovery shifts to expansion, we anticipate EM Asia economies, and particularly China, are likely to see growth decelerate even as certain developed economies likely see improved growth in coming quarters.
- We view less accommodative monetary & credit conditions, broad-based regulatory changes in China, peaking growth in goods demand, and “no tolerance” Covid-19 policies as headwinds to near-term economic growth in EM Asia.
- We believe Chinese earnings estimates for 2022 and 2023 are exposed to downward revisions, while Chinese valuation multiples represent a premium compared to prior periods of slowing activity (e.g., 2015/2016 and 2019).
- The portfolio is now materially underweight EM Asia.
Added to existing developed Asia-focused ETF holding:
- We see potential for continued re-opening to drive economic acceleration in Japan, the largest developed Asia economy, where the COVID-19 vaccination rate has nearly tripled to almost 75% in the last four months.
- We see upside to current high-single-digit earnings growth estimates in 2022 and 2023 for international developed markets, particularly in Japan, yet Japanese valuations are currently near a historic low vs. global markets.
- The portfolio now has an increased overweight of developed Asia and, in particular, Japan.
Added to existing developed Europe ETF holding:
- While COVID-19 infections in Europe remain elevated, we see potential for the region’s economic growth to sustain a healthy pace in coming quarters, driven by improving demand after multiple waves of COVID-19 disruption.
- European valuations are mixed compared to global markets: Europe ex-UK equities are trading at a discount similar to pre-COVID levels, while relative valuations on UK equities are below any point in the last cycle.
- Despite added exposure, we remain underweight Europe.