Given the uncertain market environment we are in, we advocate a defensive strategy. We are overweight sectors related to emerging market consumption, which offer some protection from lackluster demand in the West. We recommend high ROE, lowly indebted, dividend paying, stocks.
Downgrade Mexico. Mexico is now the second most expensive of all emerging markets on a P/E basis, trading on 15 times earnings, a 60% premium to the GEM index and a 80% premium to the Brazilian market. Mexican companies do create value and benefit from a low cost of capital, but we believe the market is now fully valued. Currency is another risk factor, for our forecasts suggest Mexican Peso depreciation through 2012.