Barclays is bullish on emerging markets. In a June 25th report titled Upping EM, Barclays Global Equity team notes they are increasing their recommended weighting for emerging markets in their global recommended portfolio. The reweighting involves moving EMs from a neutral 9.8% position to an overweight 17.8% position.
Barclays analyst Ian Scott and colleagues explain their bullish perspective in the introduction of their report: “EM equities have suffered from poor demand trends in DM, which have hampered their exports and earnings. An expected quickening in global growth in H2 should help reverse this.”
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Changes to Barclays global recommended portfolio
The analysts note that to free funds in the portfolio they are taking profits in Japanese equities, although they remain overweight on Japan, They also point out they.have reduced exposure in the developed Pacific ex-Japan.
Therefore, the net changes in the global recommended portfolio include adding Akbank, PKO, Shinhan Financial Group and Cemex, while exiting Daiwa House, Mitsui Chemicals, Toyota and Kraft.
Emerging markets set to move up in second half of 2015
Scott et al.begin their bull thesis on EMs by highlighting that exports from emerging markets are quite closely related to the imports of developed economies. They go on to argue that “weak demand from the developed economies during late 2014 and the early months of 2015 has been a key factor behind the negative growth in exports from emerging economies.”
Moreover, the slowdown in exports from emerging economies has hammered the earnings of many emerging market stocks. Figure 4 illustrates how exports from EMs are correlated with the EM profit cycle. Given stronger growth trends in key global economies in the second half of the year, exports from emerging markets should also move up nicely.
The Barclays analysts say it seems likely that the weak economic growth seen over the last few quarters will give way to stronger activity over the remainder of 2015. They point out that global GDP growth is to hit 3.9% (quarterly average saar) in Q3 and Q4, compared to an average of 2.7% in the fourth quarter of 2014 and the first quarter of 2015. Finally, Scott and team argue that the imminent economic rebound should be “especially strong in Asia and LatAm – as those economies would benefit from accelerations in the Chinese and U.S. economies.”