Our rotation theme from last year has panned out well with regards to investors reducing their U.S. exposure and embracing the euro and euro area equities. We expect further outperformance in the euro area, however, we also expect this theme to broaden this year, and to encompass EM assets as well.
As just-published report concluded that EM stocks offer good prospects for outperformance, especially in China. The latter offers improving earnings growth, a supportive policy backdrop and attractive valuations.
The case for EM ex-China stocks is less appealing at least for now, because of the drag from the bearish semiconductor sector, which is a sizable part of EM ex-China equities, primarily in the large Korean and Taiwanese markets. Global investors have also stayed largely on the sidelines with regards to EM assets. An EM bull will take heart from this, pointing out the significant potential upside should foreign investors warm up to EM stocks.
Net: we recommend an overweight stance on EM within a global equity portfolio, but heavily favoring China over EM ex-China until the semiconductor cycle is set to turn up.