Investors jostle to bet on rise in emerging market assets

Shift in sentiment marks ‘major reversal’ for investors after painful year for EM assets.

  • By Sarah Provan,
  • Financial Times
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Investors have piled back in to emerging market stocks and bonds following a grim performance for the asset class last year.

The most crowded trade this month is “long” emerging markets, according to a Bank of America Merrill Lynch survey of about 200 institutional investors who manage a total of $625bn. It was the first time since the monthly poll began that “long EM” was the most popular position.

The shift marked a “major reversal” from short EM as the number three crowded trade in the previous month, the investment bank said on Tuesday.

Emerging market stocks tumbled 16.6 per cent in dollar terms last year, far worse than the 10.5 per cent fall suffered by developed market equities, according to MSCI’s broad gauge of mid-and-large cap issues.

Fixed income investors were burned as well, with the spread on JPMorgan’s emerging market bond index rising last year by the most since 2011, according to Bloomberg data. Widening spreads suggest investors demanded a great premium in order to purchase the debt of EM issuers compared with low-risk paper.

A series of rate rises by the Federal Reserve and crises in countries stretching from Turkey to Argentina dealt a heavy blow to investor sentiment. At the same time, the Sino-American trade dispute stoked concerns about China, the world’s biggest emerging market.

Sentiment has brightened this year, however, with MSCI’s EM (.MXEF) stock gauge up 7.7 per cent for the year to date, narrowly outperforming its DM counterpart. Bond spreads have also narrowed as prices have risen.

“Attractive valuations, coupled with a backdrop of economic reforms and policy stimulus, support the case for EM stocks,” BlackRock, the world’s biggest money manager, noted this week. It added that while trade uncertainty was “likely to persist”, much of the angst had been “priced in”.

Despite the rally in risky assets this year, a net 44 per cent of those surveyed in February said they were overweight in cash, the highest level since January 2009 and well above the long-term overweight average of 20 per cent.

“Despite the recent rally, investor sentiment remains bearish,” said Michael Hartnett, BAML’s chief investment strategist.

A fifth of the investors surveyed said they were taking lower than normal risk levels, a slight improvement from December, but below the average of 13 per cent over the past five years.

Trade fears dominated the BAML survey as investors consider US-China animosity as the most severe risk for a ninth consecutive month, followed by China’s slowdown and then a corporate credit crunch.

Another source of concern, investors said, remains corporate borrowing. A net 46 per cent of those surveyed said companies had taken on too much debt. This was near the record high reached in December and January after a steady march higher that began about four years ago.

Worries about lending standards and overall debt burdens have been persistent in recent months as global central banks have begun pulling back on stimulus measures.

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