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Hong Kong - After a surprisingly good run in emerging markets that sent equities to a fifth monthly gain, some bulls are easing up.
Credit Suisse forecasts developing-nation equities will underperform in the short term, while Deutsche Bank Wealth Management said it’s not as positive on emerging-market bonds as a year ago.
Goldman Sachs said strong returns have partially eroded a previously compelling valuation signal, and BNP Paribas said the best gains in markets such as India and Indonesia may already be behind us.
“Much of this rally is based on improving fundamentals, which we have stressed on a lot,” Credit Suisse investment strategist Philipp Lisibach wrote in a May 26 report. “In the short run, however, the market looks somewhat stretched at this point. Fundamentals continue to be healthy, but we have the impression that the story needs a well-deserved pause.”
Emerging-market assets have won over investors amid improving prospects for growth and their resilience to US President Donald Trump’s protectionist rhetoric and geopolitical risk. The MSCI Emerging Markets Index rose 2.8% in May, taking its rally to 17% for 2017, compared with the 9.2% advance the MSCI World Index has posted this year.
Meanwhile, a measure tracking developing-nation currencies is at the highest since late 2014, shrugging off the possibility of an acceleration in Federal Reserve rate hikes leading to outflows.
Stocks in developing nations just aren’t as cheap as they were a year ago, while earnings growth has slowed at a high level, Credit Suisse’s Lisibach said. He has added emerging markets equities to his least preferred regions, though still “strongly believes” they should be part of a well-diversified portfolio, with a preference for Eastern Europe, the Middle East and Africa.
Here’s a look at what other analysts and strategists are seeing:
Capital Economics
While emerging economies are forecast to post 4.6% growth in 2017, the fastest since 2013, analysts at Capital Economics see signs that the advance may have started to slow in April and will level out at around 4% this year.
“We had anticipated that Q1 would mark the high point of the EM recovery,” Neil Shearing, chief emerging markets economist at Capital Economics, said in a May 31 report.
The firm’s GDP tracker based on monthly output and spending data showed the region grew 4.4% in March, unchanged from February, while it may have slowed to 4.1% in April. Most of the weakness was driven by China, with growth expected to ease in the coming months amid the country’s regulatory crackdown. Shearing views this as a cyclical slowdown rather than a hard landing.
Deutsche Bank Wealth Management
Emerging-market debt is also becoming less attractive thanks to the rally, with the region’s dollar-bond premium narrowing to its lowest since September 2014.
“We are still quite positive, but not to an extent about 12 months ago,” Tuan Huynh, chief investment officer for Asia Pacific at Deutsche Bank Wealth Management, said at a briefing this week. “Clearly, spreads have come down quite substantially, yields are also coming down, so your risk-return reward is not as variable.”
Institute of International Finance
Despite these views, foreign investors continued to pile into emerging markets in May.
Non-resident portfolio inflows came in at $20.5bn last month, about the same as April and above $20bn for a fourth straight month, according to IIF analysts.
“A weaker US dollar and more dovish bets on future Fed rate hikes by market participants, as well as solid EM growth, have been key drivers of portfolio inflows,” IIF deputy director Emre Tiftik and senior research analyst Scott Farnham wrote in a May 31 note.
BNP Paribas
“Previously it was very clear you want to be bullish on Indonesia, India and Brazil,” said Mirza Baig, Singapore-based head of foreign-exchange and rate strategy for Asia at BNP Paribas, speaking of the countries’ currencies and domestic debt. “It’s time to start looking at some other markets.”
China is “one of the most attractive opportunities for real money investors” over a medium-term perspective of two to five years, he said.
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