Investors turning bearish on emerging markets

A new survey of investors has found that more than one in four currently feel ‘bearish’ about emerging markets.

The HSBC survey of 120 investors from 115 institutions representing $572 billion in assets found the proportion feeling bullish about emerging markets stood at 27%.

During the last survey in July, 40% of investors surveyed felt bullish.

The reasons for sentiment turning negative included slowing economic growth and the possibility of tighter monetary policy in the United States.

Global equity markets are increasingly expecting to see tighter monetary policy from the US Federal Reserve, with the possibility of an interest rate hike.

Other central banks are also expected to take action over the coming months to slow down rising price inflation.

Murat Ulgen, Global Head of EM Research at HSBC, said:

“The global economy has faced a series of negative supply-side shocks that are causing downside risks to growth and upside risks to inflation.

“Emerging markets are a lot more susceptible to these shocks, hence their financial markets have markedly underperformed those of developed markets, and it seems like this ‘stagflationary’ backdrop is still keeping EM investors at bay.”

It’s been a poor year for emerging markets to date in 2021, with equities lagging and many currencies in the region also suffering.

Foreign investors have been selling out of local currency bonds.

Looking at valuations, emerging market equities are currently trading at their deepest discount to developed market equities since 2004. HSBC notes that the low relative cost of assets could tempt some investors to return.

However, this latest survey of investor sentiment shows that 37% of investors expect emerging market growth to improve during the next 12 months, down from 60% expecting an improvement in July.

The survey also found that investors are broadly negative on emerging market currencies, Asian local currency debt, and emerging market equities. Investors surveyed currently favour Central and Eastern European assets.