Contributed by Leila Heckman, PhD of Heckman Global Advisors
Emerging Market Equity Allocation Highlights
In Emerging Asia, we continue to underweight China and India but a little less so with somewhat improved terms-of-trade. In Emerging Europe/Middle East/Africa, the oil exporting markets of Saudi Arabia, Qatar, Kuwait, and U.A.E. are still overweighed although their terms-of-trade trend based on an 18-month trend has become more muted. In Latin America, we continue to overweight Brazil and Chile with inexpensive valuations. On the negative side, as metal/mining exporters, they have had decidedly downward terms-of-trade trend.
Although Asia continues to be underweighted, we have increased weight in several markets
We have increased our weight in several Asian markets. While China is still an underweight, we have increased our recommended weight. It has had improving terms-of-trade trend and more stable 2023 GDP forecasts. Although India is underweighted, we have also increased our recommended weight based on somewhat improved terms-of-trade. South Korea stays underweighted with weakness in earnings estimates and relatively poor price momentum over the past 12 months. We have pared back some of our overweight in Indonesia. For an emerging market, it has a relatively high forecasted 2023 price-to-earnings (14x). Nonetheless, on the positive side, it has stable 2023 GDP forecasts and strong 12-month price momentum. Taiwan stays close to a marketweight with reasonable valuations, low beta risk, and a large current account surplus as a % of GDP.
In Emerging Europe / Middle East / Africa, oil exporting markets in Mid-East continue to be overweighted
The oil exporting markets of Saudi Arabia, Qatar, Kuwait, and U.A.E. are still overweighed although their terms-of-trade trend has become somewhat muted based on an 18-month trend. On the positive side, they have stable 2023 GDP forecasts over the last 6 months, and they have low beta risk relative to MSCI ACWI. Despite the run-up of the Turkish market this year, Turkey remains inexpensive (forecasted 2023 price-to-earnings at 4x) with a vastly undervalued exchange rate (17%). However, high risks remain with sovereign risk spreads 263bp above their 2-year average. South Africa continues as an underweight with negative terms-of-trade trend and relatively high sovereign spread risk.
Latin America remains overweighted, but less so
Brazil, Chile, and Colombia remain overweighted. They remain inexpensive markets with single digit forecasted 2023 price-to-earnings ratios. However, terms-of-trade trends for Brazil and Chile trend remain negative for these mining/mineral exporting markets. Colombia’s terms-of-trade trend is more attractive since oil dominates its exports. For Brazil and Chile, 12-month price momentum is relatively strong. Peru is no longer in our “value trap” but is still underweighted. While valuations stay inexpensive, its beta risk is high, and it runs a forecasted current account deficit. Mexico remains underweighted with a slightly overvalued real exchange rate and weak price momentum over the last 12 months.
—
Dr. Leila Heckman is a highly regarded equity global strategist with over twenty-five years of experience. Dr. Heckman is the Founder of Heckman Global Advisors. Earlier in her career, she was Senior Managing Director of Global Asset Allocation at Citigroup’s Smith Barney, where she built a preeminent team that was ranked #1 or #2 by Institutional Investor’s annual global poll for four years in a row. She also served as a voting member of the Investment Policy Committee and Asset Allocation Committee of Salomon Smith Barney. She is a member of the Council on Foreign Relations. Dr. Heckman has a B.A. from Brown, a M.S. from Cornell, and a Ph.D. from NYU Tandon School. https://www.heckmanglobal.com
Leave a Reply