We are underweight Eurozone equities. Economic activity in the region has weakened. In March, manufacturing PMIs dropped to the lowest level since 2013, while services PMI continued to recover. This has led to the largest gap between the two prints since 2002. Solid services data, combined with improving China PMIs, should support Eurozone data in the months ahead and help turn around the recent negative trend. Eurozone equities, however, already appear to be priced for such a scenario, given that they have rallied 15% year-to-date. At the same time, external risks persist, as the US-China trade conflict and Brexit could weigh on sentiment.
We are neutral on UK equities, on a tactical time horizon. The UK valuation is attractive but uncertainties remain. We are underweight UK equities over a 1–4 year horizon. We see better long-term opportunities in EM dollar-denominated sovereign bonds.
We are taking Japanese equities to overweight as they have lagged other cyclical markets since the beginning of the year and should re-rate on the back of improving macro data. We have revised our earnings growth forecast for FY2019 (end-March 2020) to 3% y/y from 1% previously. We believe consensus earnings will continue to slow for some time but expect a recovery from 2H19. With valuations significantly below historical averages, we think some of Japan's quality companies are attractive.