Our tactical allocation framework using valuations, technicals, marginal economic change and marginal corporate change has recently led us to neutralise two active positions within our equity allocation.
We have cut our overweight in Europe to neutral as the events in Cyprus represent a negative shift for economic change and have the potential for adverse impacts on sentiment. Valuations are still attractive in Europe, especially when compared to the US and a weaker euro may favour some of the core exporting companies, so we are not willing to go underweight the region but believe that the uncertainties justify a neutral position.
We have covered our underweight in Japan. It remains unclear how the Japanese yen weakness will impact Japanese earnings, or how investors will adjust to the new ‘Abenomics’ mindset – that of the new prime minister Shinzo Abe – but positive developments as well as the recent momentum are enough for us to adopt a neutral stance.
We are still underweight the US where valuations are relatively unattractive and most companies benefiting from, what we believe, are unsustainably high margins.
We are positive on emerging markets, especially China, where it is now obvious that the recovery is well established and equity valuations are yet to fully reflect the growth potential.
François Zagamé is portfolio manager at Old Mutual Global Investors
