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Equities: Add long Nikkei to EM Asia
Global equity markets have gone in very different directions post the US election. EM have fared worst, Europe little changed, S&P at new all-time highs, the Russell and Nikkei on a tear higher. This is not how we were positioned so we need to ask the question of whether and what we need to change.

Table 2: MSCI EM Asia at a 2PE point discount to other equity markets

[Column Headers]
MSCI EM Asia 12m fwd PE
MSCI Japan 12m fwd PE
MSCI Europe 12m fwd PE
MSCI US 12m fwd PE

[Rows]
Latest 11.9 14.1 14.3 17.0
Min 7.6 9.7 7.4 10.4
Max 18.5 44.5 23.9 25.2
Av 11.5 18.2 14.0 15.9
SD 1.8 6.8 3.4 3.2
Z-score 0.2 -0.6 0.1 0.3
%ile 68% 31% 60% 73%
Source: BofA Merrill Lynch Global Research, MSCI, IBES

Chart 27: Japan relatively cheap at 14.1x fwd earnings
50
45
40
35
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
— MSCI Japan 12m fwd PE
Source: BofA Merrill Lynch Global Research, MSCI, IBES

If we stand back from the noise and just look at the valuations, the US is the most expensive, MSCI Asia ex the cheapest in absolute terms. Our strategists see decent earnings growth likely to come through in EM Asia, and while there is upside to US earnings estimates from potential corporate tax cuts at least part of it is priced in. Savita Subrahamian has a target for the US of 2300 in her year ahead Euphoria or fiscal fizzle?, an upside of a less than 5%. Our European strategists have an upside of around 6%. So that leaves EM Asia and Japan (given our 20k target) as the stand outs according to our equity strategists. Indeed, the PE of Japan is towards the bottom end of the range since 2000.

Sticking with EM Asia
One of our concerns on EM was a more hawkish Fed and therefore a stronger USD. So we regarded our positions in those asset classes as something of a hedge to our EM positions. As we explained above we are keeping that stance as on our central scenario there is more to go and on a risk scenario where bond markets overshoot the USD is likely to follow.

In the equity world, if our fixed income and FX forecasts are right, then we do not see them as being an impediment to our EM Asia position working again. Our EM strategists remain upbeat and Ajay Kapur actually upgraded his call to buy from a tactical pause post the election (A Call to Action: Time to BUY Asia/EMs). They think the right focus is one on growth rather than the USD and we continue to be upbeat on the prospects for EM growth, particularly in Asia. Ajay in particular makes the point that Chinese nominal GDP growth has been accelerating and that tends to be very good for Asian equity markets. Nigel Tupper’s global wave has continued to improve and he argues that remains consistent with strong performance from Asia ex Japan equities.

Bank of America Merrill Lynch
Global Cross Asset Strategy – Year Ahead | 30 November 2016 15
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