According to the bank’s 2012 “global equity strategy” report…

Underweight Brazil:
We worry that GDP growth is still 4% above trend (requiring GDP growth to be zero for a year or 2% for 2 years to return GDP growth to trend), the Real still look the most overvalued of the emerging market currencies. The low savings ratio has resulted in a current account deficit of 2.1% of GDP despite the terms of trade boost and net foreign debt of close to 50% of GDP. We worry that minimum wages are set to accelerate in 2012 to 14% and that the consumer debt service ratio remains high at 22% (although the maturity of the debt is very low). Finally on a dollar sector adjusted basis, Brazil is 22% overvalued on our models still.

Overweight Russia:
We would overweight Russia, which is also the biggest overweight of our EMEA strategy team. We are less worried about oil prices than industrial commodity prices, as China’s oil consumption per capita (pc) is 10% of US levels, while steel consumption pc is 1.5x US levels and Saudi Arabia’s government budget break-even oil price after the Jasmine spring is close to $90/bbl. Russia is the EM with the biggest P/E discount (22%) relative to its long-run average. Other key positives for Russia:
– Russia is 15% oversold versus current macro fundamentals on our strategists’ six-factor regression model
– Levels of excess liquidity suggest more robust year-on-year returns than have materialized so far- Russia appears cheap on de-trended sector-adjusted relative forward earnings;
– Equity funds are underexposed to Russia to the same degree as March 2009;
– Corporate leverage (net debt to equity) for Russia at 16% in 2011E is one of the lowest in emerging markets.
– In particular, Russia looks attractive on balance sheet criteria with government debt to GDP of 9% and private sector leverage of 48%. The budget deficit is not a concern, in our view, when it is well below Western norms and total leverage is so low.
– Russian equities should be 80% higher at the current level of the oil price (see chart)
– Top picks are Sberbank and Novatek.
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