MRB has been overweight Korean and Swedish equity markets and currencies in our global asset allocation in the past few months. The reasons to stay long these markets are compelling:
- The Korean and Swedish equity markets are both levered to the global economic cycle, with listed companies deriving a substantial portion of their profits overseas.
- These equity markets are mostly composed of highly cyclical sectors and have an extremely low weighting in defensive sectors. Globally, the former are gaining a following, while the latter are losing their allure.
- The Korean and Swedish economies have both downshifted over the past year. However, these economies do not face deleveraging headwinds and domestic policy settings are accommodative. In fact, prior easing should encourage a pickup in business activity this year, benefiting domestic earnings and related equities (including financials).
- Valuations are appealing. Korean and Swedish equities trade at comparable valuations to their peers around the globe, despite having stronger earnings potential.
- From a technical perspective, these markets have recently rallied, but are not yet overbought. We expect further upside in the coming months.
It is worth noting that MRB also likes German equities for many of the reasons listed above. We also like the Korean won and Swedish krona as a way to obtain exposure to improving global growth prospects, and prefer betting on the crosses versus the Japanese yen.
As our recent Strategic Trader report noted, these cross rates tend to be highly cyclical, appreciating during global expansion phases and depreciating during recessions. The won/yen and krona/yen crosses are highly correlated, so investors may wish to play only one or buy an equally-weighted basket of both.