We have upgraded
Turkey to Neutral and downgraded Indonesia to Least Preferred in our emerging
market equity strategy. In Turkey, we expect earnings to peak in 1H13
after a strong run. While valuations in many sectors are demanding compared to
the emerging market average and historical levels, we believe a
structural re-rating is underway, reflected by Turkey's creditrating
upgrade to investment-grade by Fitch and Moody's. We expect
Turkish equities to perform in line with the emerging market average, and thus
have changed our Least Preferred view.
Indonesia is showing
signs of economic overheating, with the combination of rising inflation and
deteriorating trade balance
calling for central bank action. While
Bank Indonesia is reluctant to raise rates, it is considering other measures,
and even if it remains passive, we believe the market is likely to
be de-rated. Inflation pressure and weak commodity prices may depress profit
margins and earnings-growth expectations, while weak GDP has cast doubt on the
potential margin improvement that is already priced in current valuations. We
acknowledge the long-term potential of Indonesia, but we hesitate to recommend
the market at its current lofty valuation levels. On a six-month view, we expect
Indonesia to underperform Asia and likely the emerging markets as well. Thus, we
have given it a Least Preferred status among emerging markets and a Neutral
status in our Asia ex-Japan strategy.
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