Overweight China and Asia. Underweight Europe. Neutral on Japan.
That’s the best approach given the current economic landscape, says Wendell Perkins, senior managing director and senior portfolio manager at Manulife Asset Management in Milwaukee.
Perkins says a recent trip to China revealed high expectations among the professional class that the government would usher in a range of market-friendly reforms.
Read: Make way for a new China
“One Chinese investor I spoke with indicated the 18th Party Congress is all about ‘reform, reform, reform.’ ” Expectations include “interest liberalization, VAT and other tax reforms, capital-account liberalization and greater exchange-rate flexibility,” Perkins explains.
These reforms require GDP growth at 8% or higher, and inflation 3.5% or lower, he adds.
Read: China overtakes U.S. in oil imports
The process will take years, but the government “fully understands the risks within its economy and is taking appropriate long-term steps to drive sustainable growth.”
Perkins singles out inflation and unemployment risk as two of the most important concerns.
Read:
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What about Japan?
Shinzo Abe and his Liberal Democratic Party returned to power in Japan last December, and monetary easing has led to a 25% depreciation of the yen relative to the U.S. dollar.
While “this may be critical for exporters to gain some much-needed competitiveness, energy inflation could undermine economic growth,” Perkins says.
Read: Hedge your bets on Japan
The drop in the yen has made oil and gas—almost all of which is imported—much more expensive because it’s priced in U.S. dollars. This cuts into domestic spending, which accounts for 60% of GDP.
The surge in energy prices could reopen the debate on nuclear power in the wake of the Fukushima disaster.
“A shift in thinking would be bullish for Japanese utilities, most of which still trade at meaningful discounts to book value,” he says.
Read: Japan stuck in recession
Eurozone woes
Perkins says Europe will “dominate the news and financial markets throughout 2013.”
He notes austerity has proven “much more painful than people imagined” and warns of the risks associated with sky-high unemployment rates in the periphery.
“You can’t have youth unemployment at 50% and expect social calm to be the norm,” Perkins says. He adds, however, that he does not expect a major upheaval.
Relative to global counterparts, European equities “no longer trade at a material discount,” and domestic economic weakness continues to move forward-EPS estimates on a path of relative decline, Perkins notes.
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