Table of contents
Executive summary 3
Continental Europe: Getting less negative 6
1) High operational leverage into a recovery 6
2) Household savings ratios are high and there is pent-up demand 7
3) Valuation looks marginally attractive 8
Yet, we still remain underweight Continental Europe 12
1) The stage of the cycle is still not quite right 12
2) The policy response has been more limited than elsewhere 13
3) Economic momentum is weaker than elsewhere 14
4) Cost cutting is more limited, and productivity growth worse, than elsewhere 16
5) The worst earnings momentum and outlook of the major regions 17
6) The non-financial sector is more leveraged than elsewhere 19
7) Tensions stemming from EMEA and the monetary union have not gone . . . 21
What to buy in Europe? 25
Be cautious of peripheral Europe, especially Spain 26
Japan: Our preferred operationally leveraged play 29
1) It is a late-cycle play on the global economic recovery 29
2) Japanese GDP is high beta into a recovery 29
3) Japan is a play on Non-Japan Asia 30
4) It is time to focus on creditors again 31
5) Relative earnings momentum has turned positive 32
6) Japanese outperformance tends to be considerable 32
7) Valuation looks modestly attractive 33
8) The implications of a possible DPJ election win 34
US: Down to underweight! 38
1) It is a defensive market 38
2) Valuations are not relatively attractive 40
3) The household sector is still overleveraged 41
4) US investors tend to become more international as markets rise 42
5) The dollar: No strong view . . .neither bears, nor bulls 43
GEM: Reducing our overweight 47
1) Valuations look extended 47
2) Euphoria 47
3) Relative economic momentum has peaked 48
Reduce NJA to 15% overweight 49
UK: Reduce to 5% overweight 59
Four reasons to be a little more cautious on the UK 59
Why still overweight? 62
Appendix 1: Regional weightings table 66
Appendix 2: US & European earnings forecasts 67
Appendix 3: Country risk table 68
Appendix 4: UK government support for the financial sector 69