We have increased our emerging market equity weighting to neutral from underweight. Emerging markets largely disappointed in 2011, down about 19% versus a positive 2% for the S&P 500, despite better economic and earnings growth than developed-world equities. We think the primary causes of last year's underperformance were (1) restrictive policy to rein in inflation (mostly food-related, but also from property speculation in the case of China) and (2) a general 'risk-off' attitude among investors worried about potential catastrophic consequences arising from a Lehman-like failure in Europe. These fears appear to be fading; thus, given emerging markets' attractive valuation and fundamental growth prospects, we no longer want to be tactically underweight our strategic benchmarks.

David Fuller's view This makes sense to me. There are plenty of attractively valued equities in the world's stock markets. However, for debt-burdened western economies, there is no easy solution to the problem of insufficient GDP growth. It is far easier to stimulate corporate spending and domestic consumption in so-called emerging economies where governments are in surplus and household savings rates are high.