As noted in a report last week, important shifts in market leadership typically emerge at the start of an economic recovery. In the current environment, such a shift would favor non-U.S. markets after last decade’s massive U.S. outperformance. However, despite rich absolute and relative valuations, the U.S. still has a stronger underlying earnings profile and, thus, for now we are maintaining an overweight stance on the U.S. within a global equity portfolio. Although the overall earnings outlook will improve in the months ahead as the global economy re-opens, greater clarity is needed to justify shifting into a pro-growth regional equity posture that would favor non-U.S. markets.
In terms of specific markets, increasingly positive policy steps caused us to recently upgrade euro area equities to neutral. EM equities are bifurcated between well positioned markets including China, Korea and Taiwan, and the rest. We favor the former in a global equity portfolio, with a neutral stance on the overall EM group. More global reflation is needed to upgrade Japan from underweight, while we also remain cautious toward commodity-driven Australia and Canada, and expect the U.K. to continue to lag.