Investors are starting to look afresh at emerging equities, after years in which the sector has been a consensus "sell".
Barclays, Citi, HSBC, Morgan Stanley and Societe Generale are among banks now advising clients to buy back in, albeit selectively, after a prolonged sell-off that has slashed valuations.
"The timing of that decision will determine people's performance (for the year)," said Fredrik Nerbrand, global head of asset allocation at HSBC, who has a 40 per cent portfolio exposure to emerging market (EM)-related assets through hard and local currency debt, commodities and equities.
Since June 2013, the first full month after US Federal Reserve chairman Ben Bernanke flagged plans to cut its massive monetary stimulus efforts, fund flows out of the broad swath of countries collectively known as EMs have been huge.
Worries about the impact of US monetary tightening and a prospective economic slowdown in China have been joined recently by political tensions over Ukraine and in Turkey. While those with a need to invest in EMs focused on picking winners, often, countries with a current account surplus, or raised their cash holdings for a period, those with a broader investment brief quit the sector in droves. Outflows from emerging equity funds have totalled $100 billion in the past 12 months, or almost a tenth of assets under management, according to Morgan Stanley analysts, who base their calculations on EPFR Global data.
A record 31 per cent of investors are currently underweight on emerging stocks, according to Bank of America Merrill Lynch's latest monthly poll of funds, with $509 billion under management. By all accounts, most of this cash returned home to Europe and the United States. But after 22 weeks of outflows, losses have slowed to a trickle. "The view in the market has been generally bearish, particularly since Ben Bernanke spoke about tapering. A lot of funds were badly hurt by that," said Societe Generale cross-asset strategist Ahmed Behdenna. His bank, bearish on emerging stocks for the past three years, is now advising clients to buy, going from zero-weight to underweight.
So while it still recommends holding fewer emerging equities compared to their share in the index, Societe Generale until recently advised having no exposure at all.
The change in stance has been driven by low valuations, how geared Asian countries are to the recovering US and European economies, and recent robust action by EM central banks to defend their currencies, Behdenna said.
Currencies such as the Indian rupee and Brazilian real have rallied around 10 per cent off lows hit last year.
"We have seen a lot of outflows and so valuations are at very low levels, especially compared to developed markets such as the United States," he added.
DIVERGENCE
Emerging equities have a lot of catching up to do. Since end-2010 MSCI's emerging index has lost 13 per cent while the US S&P 500 has gained almost 50 per cent.
Even since Bernanke's May 2013 speech, Wall Street is up around 10 per cent while emerging markets have shed more than six per cent.
That masks some serious divergences, however: China's CSI300 index is 17 per cent lower and Indonesia and Brazil down 9-12 per cent, while India is up 10 per cent.
Headwinds still blow in the form of slower growth, upcoming elections and fears over China's debt mountain, says Jonathan Bell, CIO of Stanhope Capital, which runs $8.5 billion on behalf of wealthy families and charities.
Bell is capping emerging markets exposure to 20 per cent of his total equity position. Yet he reckons investors should now consider reducing exposure to "overvalued" markets such as the United States in favor of Asia.
"The market is already expecting bad news in these markets. If the news is bad, it's probably already in the price, and if it's good it could give a bit of a boost. Combined with the valuations, to our mind makes them compelling," he added.
ING Investment Management, which has $238 billion under management, last week changed its position on emerging stocks to neutral from underweight.
"We keep our negative strategic stance but feel that given how well the markets have digested the bad news of the past months, there is a good chance EM currencies continue to rally," ING IM's investment strategist, Maarten-Jan Bakkum, said.
"That is always good for EM equities."
Barclays, Citi, HSBC, Morgan Stanley and Societe Generale are among banks now advising clients to buy back in, albeit selectively, after a prolonged sell-off that has slashed valuations.
"The timing of that decision will determine people's performance (for the year)," said Fredrik Nerbrand, global head of asset allocation at HSBC, who has a 40 per cent portfolio exposure to emerging market (EM)-related assets through hard and local currency debt, commodities and equities.
More From This Section
"When I talk to investors, most people agree with us on a valuation basis, but are concerned about the headline risks that still persist in some EMs."
Since June 2013, the first full month after US Federal Reserve chairman Ben Bernanke flagged plans to cut its massive monetary stimulus efforts, fund flows out of the broad swath of countries collectively known as EMs have been huge.
Worries about the impact of US monetary tightening and a prospective economic slowdown in China have been joined recently by political tensions over Ukraine and in Turkey. While those with a need to invest in EMs focused on picking winners, often, countries with a current account surplus, or raised their cash holdings for a period, those with a broader investment brief quit the sector in droves. Outflows from emerging equity funds have totalled $100 billion in the past 12 months, or almost a tenth of assets under management, according to Morgan Stanley analysts, who base their calculations on EPFR Global data.
A record 31 per cent of investors are currently underweight on emerging stocks, according to Bank of America Merrill Lynch's latest monthly poll of funds, with $509 billion under management. By all accounts, most of this cash returned home to Europe and the United States. But after 22 weeks of outflows, losses have slowed to a trickle. "The view in the market has been generally bearish, particularly since Ben Bernanke spoke about tapering. A lot of funds were badly hurt by that," said Societe Generale cross-asset strategist Ahmed Behdenna. His bank, bearish on emerging stocks for the past three years, is now advising clients to buy, going from zero-weight to underweight.
So while it still recommends holding fewer emerging equities compared to their share in the index, Societe Generale until recently advised having no exposure at all.
The change in stance has been driven by low valuations, how geared Asian countries are to the recovering US and European economies, and recent robust action by EM central banks to defend their currencies, Behdenna said.
Currencies such as the Indian rupee and Brazilian real have rallied around 10 per cent off lows hit last year.
"We have seen a lot of outflows and so valuations are at very low levels, especially compared to developed markets such as the United States," he added.
DIVERGENCE
Emerging equities have a lot of catching up to do. Since end-2010 MSCI's emerging index has lost 13 per cent while the US S&P 500 has gained almost 50 per cent.
Even since Bernanke's May 2013 speech, Wall Street is up around 10 per cent while emerging markets have shed more than six per cent.
That masks some serious divergences, however: China's CSI300 index is 17 per cent lower and Indonesia and Brazil down 9-12 per cent, while India is up 10 per cent.
Headwinds still blow in the form of slower growth, upcoming elections and fears over China's debt mountain, says Jonathan Bell, CIO of Stanhope Capital, which runs $8.5 billion on behalf of wealthy families and charities.
Bell is capping emerging markets exposure to 20 per cent of his total equity position. Yet he reckons investors should now consider reducing exposure to "overvalued" markets such as the United States in favor of Asia.
"The market is already expecting bad news in these markets. If the news is bad, it's probably already in the price, and if it's good it could give a bit of a boost. Combined with the valuations, to our mind makes them compelling," he added.
ING Investment Management, which has $238 billion under management, last week changed its position on emerging stocks to neutral from underweight.
"We keep our negative strategic stance but feel that given how well the markets have digested the bad news of the past months, there is a good chance EM currencies continue to rally," ING IM's investment strategist, Maarten-Jan Bakkum, said.
"That is always good for EM equities."