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EM Bulls Energised

HSBC EM Sentiment Survey.

  • Our 11th survey suggests EM investors are unfazed by recent market volatility as sentiment keeps improving
  • Risk appetite has picked up and cash levels have fallen further
  • Investors expect continued positive spill-over from China reopening

Investors feel confident about the outlook for emerging markets (EM) and seem unfazed by recent financial market volatility, according to the latest HSBC EM Sentiment Survey. Some 47% feel “bullish” on EM prospects over the next three months, up from 29% in the previous survey in December. The proportion who feel “bearish” is nearly unchanged at 17% versus 18%. This makes for the most bullish overall net sentiment score since our July 2021 survey.

In a further sign of investor confidence, their risk appetite score – measured on a scale where “0” is “no risk” and “10” is “highest risk in EM” – has also picked up to 6.9 from 6.1. This is the second-highest reading since our surveys began in 2020. Cash levels have dropped on a weighted-average basis to 5.1% of assets under management from 6.1%, showing investors are ready to increase their exposure to EM risk assets.

The survey was conducted between 24 January 2023 and 6 March 2023 among 138 investors from 133 institutions representing USD547bn of EM assets under management. The fieldwork followed a strong risk rally stretching from late 2022 and early 2023. It also coincided with a mixed picture of macroeconomic news: on one hand, renewed worries about sticky inflation, continued tight monetary policy globally and a re-energised US dollar; and on the other, a smooth reopening in mainland China and generally supportive economic activity data.

Although the external backdrop is rather mixed, it is nonetheless a step up on the very challenging conditions that prevailed for most of 2022, and this relative improvement appears to support investor optimism. Investors’ top concern is still the possibility of recession in major economies, ahead of the prospect of rate hikes from developed market central banks including the US Federal Reserve. But looking on the positive side, 40% of respondents argue that “a strong rebound in mainland China” is the biggest upside risk to the EM outlook.

Perhaps reflecting the positive impact of mainland China’s reopening, 53% of the respondents now expect EM economic growth to accelerate over the next 12 months, versus 34% in December. Digging deeper into the potential impact of stronger-than-expected mainland Chinese growth, nearly half of investors believe base metals (47%) and tourism (46%) would be the key beneficiaries, followed by energy commodities (42%) and consumer products (39%) versus capital goods at only 13%. This suggests that investors expect the property sector and consumption, rather than investments, to lead the rebound.


What does all of this mean for investor positioning and strategy? Back in December, survey respondents were most upbeat about Latin America, and since then the region has indeed outperformed across all asset classes. Now, investors seem to have trimmed that bullishness in favour of Asia, whose net sentiment score has improved across the board, and especially for equities and FX. This positive tone towards Asian equities is reflected most in mainland China, Taiwan and India. Outside of Asia, Brazil and Saudi Arabia equities are favoured.

Among asset classes, investors seem to have grown increasingly bullish on EM FX, despite the recent rise of the US dollar, with 67% expecting EM currencies to appreciate over the next three months, up sharply from 22% in the December survey. In EM fixed income, the preference for local versus hard currency debt seems to be more balanced now versus a distinct bias for the hard currency debt previously. And a majority of respondents (63%) now expect EM equities to outperform their DM counterparts over the next three months.

Finally, the survey suggests a further pick-up in environmental, social and governance (ESG) investing, with the proportion of investors running an ESG portfolio, either directly, partly or indirectly, rising to 38% from 29% in the December survey. This could perhaps be attributed to regulators implementing stronger ESG disclosure and accountability rules.

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