With the oil price at an 11-year low and emerging market equities down more than 20% in euro terms since the start of the year, Europe’s fund buyer community seems to think this is about as bad as it will get. Or they are simply tired of waiting to get back in, as pretty much all other asset classes look expensive now…
Either way, emerging market equities are in fashion again after a long period of bearish sentiment. Fund buyers across Europe are now following in the footsteps of the Finns, who were already planning to increase their allocation to EM equities as early as August. An average of 40% of fund selectors now aim to increase their allocation to the asset class in the
next 12 months, while only 16% plan a decrease.
In as little as three months, their outlook for EM stocks has reversed. In October last year, fund buyers in all but two countries were net sellers of the asset class. Now, only Spain and Belgium have more sellers than buyers. In fact, we have to go back to spring 2013 to find investors as buoyant about EM equities. But those who bought into the asset class at that time might not want to be reminded about what happened next: emerging market equities got caught up in the so-called ‘taper tantrum’ later that year and EM equity investors consequently suffered big losses.
Anyway, we ask investors whether they will increase their allocation at any point in the next 12 months. So even if they answer yes to this question, their short-term outlook could still be negative and they could also mean they only plan to increase their allocation in the second half of 2016.
“On the short term, the problems in the Chinese A-share market are a destabilising factor which can also unsettle the H-share market through an ensuing depreciation of the renminbi,” says Rishma Moennasing (pictured right), an equity fund analyst at Rabobank in the Netherlands. “So we have warned our clients that they are likely to face high volatility in the coming months.”
Bearing in mind the high volatility in recent months, Moennasing deems it wise to stick to relatively conservative funds in the asset class. “We prefer funds focusing on low-volatility and quality which target companies with stable cash flows, such as the Robeco Emerging Conservative Equity Fund, which is a low-volatility strategy, and the Sparinvest Ethical Emerging Markets Value Fund,” she says. “Despite its name the latter fund doesn’t only focus on companies with attractive valuations, but also on quality.”
But on the medium-term, her outlook is brighter. “We will probably stick to our overweight considering the attractive valuations there. And despite the bad news we keep receiving about China, it is still growing at a decent pace,” she says.
Not everyone is convinced investing in conservatively positioned funds will be sufficient to justify investing in EM equities at the moment though. “We think volatility is very high,” says Neil Dwane, global strategist at Allianz GI. “The currencies in emerging markets make it very fraught and also very hard to hedge, and therefore, we are not totally convinced that you are getting paid for the risk you are running.”
Acknowledging earnings growth in emerging markets is negative at the moment, head of emerging market equities at Aviva Investors William Ballard believes markets are now oversold. “There is only a very slow earnings decline now, and I think this is a mismatch with the sharp decline of EM equity markets. In 2008 and 2009 earnings decline was much larger, but markets get punished in quite the same way now,” he says. “So I think people are too negative now.”
These negative feelings are also not in line with actual earnings growth expectation for 2016, Ballard stresses. “Consensus earnings growth forecast are at 7% for US equities, European equities as well as emerging market equities. Does that justify this discrepancy in valuations between these markets?”