Money manager executives' fingers are hovering over the “buy” button on emerging markets.
On one hand, a potent combination of falling markets, China's slowdown and currency weakness continues to batter the emerging world.
On the other, the prospect of a U.S. rate hike, relatively cheap valuations and an anticipated widening of the GDP growth ratio between developed and emerging markets is attractive.
“Emerging markets right now do offer some relative value compared to developed markets, but I have to emphasize "relative' — they are not ridiculously cheap relative to previous bear markets,” said Russ Koesterich, global chief investment strategist at BlackRock Inc. in San Francisco. “But given that they have been underperforming for a long time, and a lot of the gains in the developed markets have been driven by multiple expansions in the last four or five years, there is some weight to the argument to increasing (positions) in emerging markets.”
Investor sentiment has been noticeably weaker — with even the faith of long-term-focused institutional investors beginning to waver.
Data from eVestment LLC show $7.5 billion of net outflows within its All Emerging Markets Equity universe over the three months ended June 30, which followed four consecutive quarters of net inflows. The provider's All Emerging Markets Fixed Income universe shows debt has been out of favor for a longer period of time — it recorded net outflows for the past four quarters, with the three months ended June 30 showing net outflows of $2.6 billion.
None of the money managers contacted by Pensions & Investments said they have experienced institutional investor outflows. In fact, they are seeing some clients choosing to add to positions as they believe markets are set to turn around.
However, some of the money management executives themselves have their fingers firmly pressed on “pause” when considering whether to buy emerging markets securities.
“The conclusion is that we think it is too early,” said Wouter Sturkenboom, London-based senior investment strategist at Russell Investments. “That is predicated on two things — the business cycle development in emerging markets is still very challenging. On top of that, we look at sentiment, as a combination of momentum and contrarian indicators. Momentum is negative, whereas contrarian (indicators) are starting to pick up interesting buy opportunities. The combination is neutral — we are looking for it to pick up.”
Emerging markets have been battered by years of underperformance, weakness in their local currencies relative to the U.S. dollar, and more recently by the slowdown and uncertainty in China.