Merrill Lynch Wealth Management’s chief investment officer (EMEA) Bill O’Neill said earnings expectations in North America are proving resilient despite recent poor economic numbers and that equity valuations were still favourable.
“Last week we decided to reduce the very heavy underweight position to European equity by selling some North American equity,” he said. “The upshot is that portfolios are still overweight exposure to North American equity and underweight to European stocks, but in somewhat milder proportions than before."
In Europe, he says optimism on earnings weakened and risk premiums were higher given ongoing sovereign debt concerns, while in the UK there was uncertainty on the domestic policy outlook.
“This reflects the view that, on balance, the outlook for US earnings is still somewhat better than for Europe, but that some of the other indicators (such as valuations and sentiment) were reaching such extreme levels that it was deemed a prudent move to lock in some of the relative outperformance that has accrued from holding the position for as long as we have,” he explained.
The portfolio still remains overweight Japanese equities as O’Neill believes while there is still "policy paralysis" in dealing with an overvalued yen, equity valuations and activity are improving.
O’Neill remains neutral emerging markets as he deemed valuations to still be reasonable but is heavily dominated by inflation risk.
