martes, 8 de abril de 2014

martes, abril 08, 2014

April 4, 2014 9:04 am

Investors rekindle their love for emerging markets


It has been a tough few years for emerging market investors.


If you had put $100 into the S&P 500 index on April Fools’ Day 2011, it would be worth $140 today. If you had put the same $100 into the MSCI EM index – as many investors back then preferred toit would be worth $85. EM bonds and currencies have done little better. Once the darlings of global investors, many former EM growth stories have become pariahs.




Back in favour
EM currencies


But is the tide turning – indeed, has it already turned? Luca Paolini, chief strategist at Pictet Investment Management in London, says there has been a shift in sentiment regarding EM assets in general.

“A month ago we were among the few sayingbuy’,” he says. Now he believes other investment managers are joining in.

Indeed, a new EM portfolio flows tracker from the Institute of International Finance shows rising inflows to EM equities and bonds since the start of this year: $5bn in January, $25bn in February and a respectable $39bn in March.

“It is still very differentiated,” Mr Paolini says. “There is not going to be a huge EM rally. But just as it was hard to believe that all developed markets were awful and EM was all great a few years ago, it’s hard to believe the opposite is true now. There have been massive flows from EM to DM and we expect some of it to flow back.”


Mr Paolini says there are tactical investments to be picked up as valuations have fallen. One example is Chinese banks. “The sell-off has gone too far. Sure, non-performing loans may go to 10 per cent but their assets are in [the state’s] reserve requirements and the state has unlimited firepower. Even if the share price falls you are still getting a dividend yield of 7 per cent.”

Mr Paolini breaks EM equities into four categories. One is the “very cheap”, such as Turkey, South Korea, Russia and China. He says only Russia and China are interesting, because they have the potential for policy flexibility

“Even in Russia we could see some supply side reforms,” he says. Another is the “expensive”, such as Mexico and the Philippines. These countries, with good fundamentals and positive policies, are expensive for a good reason.

A third is the “challenged but improving”. Prime examples are India and Indonesia, two countries that have attracted a lot of investor attention because they hold out the prospect of policy change and have seen clear improvement in their trade accounts. “They are getting the benefit of the doubt,” says Mr Paolini. “But they are too dependent on the outcome of their elections and they are not cheap.”

Last is the “lacking in promise”. This category includes Brazil, South Africa and Turkey. These countries, says Mr Paolini, offer little prospect of change in their political landscapes, have classic EM negatives (such as current account deficits) and are not even cheap (with the exception of Turkey).

That is hardly a ringing, across-the-board endorsement and it underlines the need for differentiation. Mr Paolini says his current top call is on local currency sovereign debt. Upside here is driven by global risk appetite, which he sees holding steady, by the fact that many EMs are coming out of their interest rate tightening cycles, and by attractive valuations. He points to the IIF figures as evidence that this idea is taking hold: of the $39bn portfolio flows to EM in March, $24bn went to bond markets.

Those inflows have been driven by “real moneyinvestors at big institutions, in contrast to retail investors, who withdrew $58bn from EM funds during the first quarter of this year according to EPFR, a fund flow watcher.

Luis Costa, head of CEEMEA rates and foreign exchange strategy at Citibank, says many institutions were caught off-guard by the sell-off in EM currencies in January and rushed to buy dollars to hedge their investments in EM local currency bonds. But by February conditions normalised, yields on US Treasuries came down and investors started taking hedges off. Mr Costa says the resulting retracement was accompanied by new money entering EMs from big institutions.

“We saw some big movement in what were the most hated currencies, like the South African rand,” he says. The rand recovered from lows of more than 11 to the dollar at the end of January to about 10.60 today. Other currencies such as the Indian rupee, the Indonesian rupiah and the Brazilian real have seen similar recoveries.

Mr Costa expects this retracement in EM currencies to continue, largely because big institutions have become more relaxed about the prospect of tapering and of eventual rising interest rates in the US – they think it will be postponed. Markets are pricing in a much more gradual rise in US interest rates. So they are becoming more resilient to positive prints from the US,” he says.

This is happening in spite of wide recognition that structural flaws are still of concern for many emerging markets. In credit and currencies as well as equities, it is a matter of taking value where it can be found.


Copyright The Financial Times Limited 2014.

0 comments:

Publicar un comentario