Outlook 2013: What else can go wrong?
􀂄 Risks remain
We are concerned about GEM equities in 2013 because of ROE decay, EPS
downgrades and high volatility. 2012 showed us that it is the level of global GDP
growth that is important for GEM equity performance, GDP growth in the
Emerging Markets itself is not sufficient. UBS forecast for 3% global GDP growth
next year is probably not high enough to achieve the consensus earnings growth
forecast for GEM equities of 13%. A single digit growth rate is more likely.
Valuations are low but are not, per se, a catalyst for higher returns, and volatility
could remain high.
􀂄 Downgrade Brazil & Colombia; Upgrade India
We swap Brazil for India and downgrade Colombia on valuation grounds.
Brazilian ROE has halved from its peak of above 20% in 2006 to just 10.8% today.
A structurally lower ROE leaves the market at fair value by our estimates. The
potential for further reform in India and a swing in its economic momentum
causes us to prefer India to Brazil.
􀂄 Preference for domestic cyclicals, small & mid cap; focus on quality
We continue to prefer the domestic cyclicals - Financials and Consumer
Discretionary - that are more exposed to local rather than global growth
conditions. The valuation of defensive sectors remains too high so we continue to
seek defensive stock characteristics in the form of high ROE and dividends.