Turning a corner
Half of the interviewed fund selectors are bullish on emerging market stocks, while a third of the respondents plans to decrease their weighting or doesn’t use the asset class. Of those stepping up their allocation, several are convinced markets are bottoming out as investor sentiment is now at the lowest level since 2008. After the disappointing results of the past years, with the MSCI Emerging Markets Index lagging its developed market peers each year since 2011, quite some of them feel it’s time for a ‘contrarian trade’, considering emerging market equities have consistently outperformed their developed peers from 2000 to 2010.
On top of that, most interviewees are currently underweight in the asset class after they had decreased their allocation last year following the start of the U.S. Federal Reserve’s monetary policy tightening. While there is a consensus among fund selectors that emerging market stocks are currently attractively valued, many interviewees are hesitant to step in immediately. Most bullish investors prefer waiting a bit for now, and plan to step up their allocation during the course of the year.
EMD-buyers outnumber sellers
The fund selectors approach emerging market debt (EMD) in a similar fashion as EM equities, with many favouring a wait-and-see approach for the time being. Most agree on both local and hard currency EMD being cheap, with some respondents expecting prices to decrease even further.
Sentiment between government bonds and credit is around the same level, with some interviewees citing strong upside potential for hard currency (corporate) bonds, while others are seeing more value in local currency debt as a consequence of the strong depreciation of many emerging market currencies over the past months.