Global Equity portfolio positioning intra-quarter update as of 7/29/2021

Shifted exposure within Asian equities from an overweight of emerging markets to an overweight of developed markets

July 29, 2021

Actions and Overview:

Tilted Asian overweight from emerging to developed markets

• Trimmed an emerging Asia-focused ETF holding
• Added to an existing developed Asia-focused ETF holding
• Full portfolio rebalance

While we continue to see prospects for strong global GDP growth in the coming quarters, growth in Asian emerging markets (EM Asia) has begun to slow, even as growth in certain developed economies appears poised to accelerate.

China, which dominates EM Asia, was the first country to experience a COVID-driven recession and rebound, but appears to be moving past its initial burst of economic recovery. Given the extent of economic progress and EM Asia, less accommodative credit conditions in China, and increased regulatory uncertainty around EM Asia’s largest sectors (e.g. Info. Tech., Comm. Services, and Consumer Discretionary), we expect economic growth in EM Asia will moderate to a more normalized economic expansion.

In contrast, developed international economies collectively remain in a recovery upswing, and we see particular opportunity in developed Asia. The Japanese economy has yet to experience as strong of an economic rebound as other major developed economies, partly due to a slow roll out of COVID vaccines, but Japan has recently seen rapid growth in vaccination penetration, which we expect will contribute to a pickup in economic activity in the coming months. We believe current economic and earnings estimates understate the potential recovery in Japan, and we view its equity valuations as attractive relative to other developed market equities.

Along with these adjustments, we also rebalanced portfolios.

UPDATE DETAIL

Trimmed emerging Asia-focused ETF holding:

• We believe China, the largest economy in EM Asia, is likely to see growth continue to slow now that it is beyond its COVID re-opening burst and revert to pre-pandemic growth rates which, though higher than most developed counties, are less attractive than earlier in the recovery.
• Credit conditions in China (historically a key catalyst for its economy and markets) have become less accommodative as the government curtailed large stimulus efforts enacted during the pandemic, and we believe Chinese monetary officials are unlikely to reinvigorate rapid credit growth, particularly as the Chinese central bank maintains its ongoing objective to curtail the rise in speculative credit.
• Chinese and EM Asian equities are unlikely, in our view, to experience a near-term rebound in positive sentiment as virus concerns and rising regulatory tension for some of the largest industries and companies in EM Asia persist.
• EM Asia equity valuations have compressed in recent months relative to the developed world, but we believe that is warranted given the concerns mentioned above.

Added to existing developed Asia-focused ETF holding:

• Japan is a key driver of developed Asia, and we believe it is poised for economic and market rebound.
• We believe Japan’s economy is now in the early stages of a sustained recovery, supported by rapidly rising vaccination rates that could soon rival other developed countries.
• We expect a greater earnings recovery than what currently appears to be priced into Japanese equities, where valuations relative to other developed counties are cheaper than pre-pandemic periods, even as we believe certain industries in Japan have the potential to materially exceed consensus earnings estimates for 2022 and beyond.
• While this allocation adjustment primarily added Japanese exposure, it also added exposure to other advanced Asian markets where we see similar positive risk/reward profiles.