GEM Equity Strategy - Cyclicals: Better value in Latam and EMEA - Credit Suisse

■ Cyclicals outperformed defensives by 82% in Asia versus 37% for EMEA and just 14% for Latam. In our 12 April report, we had highlighted that in Asia ex-Japan, cyclicals (defined as Energy, Materials, Tech, Industrials and Consumer Cyclicals) had outperformed defensives (Staples, Utilities, Telcos) by a massive 82% since the lows in November 2008. The 82% outperformance in Asia compares with 37% for EMEA and just 14% for Latam.

■ Better value in Latam and EMEA? We believe a key reason for the huge difference in performance was the starting point on valuations. Asian cyclicals started the rally with much higher discounts. But now we are finding a 43% discount for Russian Energy versus a 50% premium for Indonesian coal. In Brazil, Materials are now trading at a 16% discount compared with a 73% premium a year ago. Even in South Africa (our biggest Underweight GEM market), the premium on Materials has dropped from 94% a year ago to 27%.

■ We continue to Overweight cheap cyclicals. While we continue to suggest taking profit in overvalued cyclicals (Indonesian Coal, Singapore/ Malaysia Palm Oil, Chinese Metals), we continue to Overweight cheap cyclicals. Undervalued cyclicals include Russian Energy; Brazil Materials; Korean Autos, Tech and Industrials; Chinese Oils; and Australian Resources.