Global equity strategy
STRATEGY
Regional strategy
We upgrade the UK to overweight from benchmark to reflect: (a) policy—
monetary conditions (exchange and interest rates) are now looser than other
regions and normally monetary conditions lead economic activity by a year. The UK
now seems to have a workable bank insurance scheme. QE amounts to 7.5% of
M4 and credit conditions have eased more than in other regions; (b) above-average
earnings momentum; (c) sterling looks cheap (15% discount to PPP against the
euro); (d) attractive valuations (sector-adjusted P/E 31% below US, compared to
11% norm); and (e) greater exposure to NJA, our preferred region, than Europe or
the US. The UK scores top of our regional scorecard. Cheap domestic UK names
on HOLT®: Carphone Warehouse, Tesco, Premier Foods. Stocks that look cheap
relative to their global peers are Vodafone, Meggitt, Barclays. Positions should be
un-hedged.
We increase our weighting in NJA to 40% overweight from 30% (we initially
upgraded end-October). NJA has the best balance sheets, allowing more policy
flexibility than other regions (macro: government debt to GDP is 30%, while the IMF
expects the ratio for advanced economies to go to 104% by 2011, FX reserves are
40% of GDP; private sector: the gross savings ratio is triple that of the US and the
banking sector is underleveraged). Credit Suisse economists forecast 8% Chinese
GDP growth. The money multiplier is rising. NJA seems to have benefited the most
from the fall in food and oil prices. Historically, the region tends to outperform two
months before the upturn in lead indicators and has continued to outperform until 17
months after the trough in lead indicators. NJA currencies are in aggregate 7%
undervalued. NJA is used to recurrent crises and tends to have more command
economies. Cheap countries on our scorecard include China. Cheap indirect plays
(on HOLT) include Reckitt, Alcatel, Siemens, CAT.
We lower the US to benchmark: The relative performance of the US
deteriorates as lead indicators turn up. The US is now expensive on our
regional scorecard (sector-adjusted P/E ratio is on a 41% premium to Europe).
Earnings momentum is now middling. The correction in private sector balance
sheets is less than half-way through in our view. On our screens, US stocks
expensive relative to their peers include Hershey (see page 54). Expensive
overseas earners include Southern Copper, Black & Decker, RPM International.
Stay 20% underweight Continental Europe: In our view, the region has the worst
macro policy (fiscal, QE or monetary), the worst labour market and economic
flexibility and the worst earnings outlook (we forecast minus 46%, compared to
consensus of minus 2% and minus 20% ex-financials). A quarter of exports (a third
of GDP) go to Eastern and peripheral Europe, which may go through a depression.
Valuations are only mildly cheap on P/B relatives. Be careful of expensive domestic
Europe exposure, i.e., companies with more than half of sales to Europe and
expensive on HOLT (Fraport, SKF, Scania), expensive peripheral Europe (ACS
Actividades, Inditex, Bankinter) and expensive EMEA exposure (Telekom Austria,
Beiersdorf, Atlas Copco). We stay underweight EMEA (ex Russia) and are
benchmark Japan. Japan scores badly on our scorecard (economic and earnings
momentum, monetary conditions), but it is a cyclical market.

Table of contents
Regional strategy 3
NJA: Further increasing our weightings 4
What about GEM overall? 19
Continental Europe: Staying underweight 22
Eastern Europe ex Russia: We remain very cautious 34
UK: Upgrade to overweight from benchmark 37
US: Downgrade to benchmark 49
Japan: Stay benchmark 55
Appendix 1: Regional scorecards 63
Appendix 2: Chinese economic indicators 65
Appendix 3: Government debt in advanced economies 66
Appendix 4: China GDP composition 67
Appendix 5: Labour flexibility scorecard 68
Appendix 6: Fiscal packages 69