Two thirds of Munich’s fund selectors said they are going to increase their EM equity holdings over the next 12 months, the highest figure ever recorded in Germany. Moreover, it’s a percentage not yet seen during 2014’s EM equity sentiment rally.
Cards on Asia
Sentiment towards the asset class is materially more positive than in January this year, when it was measured last, though fund selectors in the city have always been fans of emerging market equities. Munich fund buyers are now particularly enticed by the asset class because of the rosy macroeconomic picture, especially for Asia. A number of interviewees mentioned commodity- and export-reliant economies like Indonesia, Korea and Thailand, which has rallied strongly following the military takeover in May, as attractive markets. China is also popular with some fund selectors, despite the problems it is facing on its real estate market at the moment.
An exception to the fund selector enthusiasm was, unsurprisingly, made for the current pariah of the West, Russia. Though most interviewees said they expect the current conflict between Russia and the West can be contained, they see negative consequences for Western companies with a large exposure to Russia. One fund selector, who invests in sports-related equities, pointed out that 20% of the revenues of Adidas, the German sportswear maker, are generated in Russia.
Attractive emerging market debt
Emerging market debt, especially government bonds which are usually denominated in local currencies, are popular for largely the same reasons as emerging market equities. Though some fear the effects of Fed tapering on the asset class, following last year’s mini crash affecting the asset class, most think this will be offset by looser monetary policy on the side of the ECB.
Rotating from high yield to emd
Munich’s fund selectors even are Europe’s biggest enthusiasts on EM government bonds, with half of interviewees saying they will increase allocation to the asset class. While none of them plan to decrease their exposure to emerging market debt, EM credit is markedly less in favour, with many saying they find the asset class too risky and opaque to invest in. Only a quarter will increase their allocation, while 42% have no exposure to the asset class at all.
The popularity of emerging market debt contrasts markedly with that of the other fixed income categories, notably high yield. Many fund selectors told our researcher they are planning to decrease or liquidate their high yield positions as they feel spreads have tightened too much. They have decided to move to emerging market debt instead.