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Investors turn more bearish on emerging markets.

Major investors have become more cautious about the outlook for emerging markets (EM) against a backdrop of slowing growth, rising inflation and the prospect of Federal Reserve tightening, according to the latest HSBC EM Sentiment Survey.

The poll found that 27% of investors feel ‘bearish’, a sharp rise from just 9% in the July edition of the survey, while the proportion feeling ‘bullish’ dropped to 27% from 40%.

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.

The survey – the sixth of its kind in a series first launched in June 2020 – was conducted between 28 September 2021 and 17 November 2021 among 120 investors from 115 institutions representing USD572 billion of EM assets under management.

It shows that investors have pared back their expectation for EM economic activity, with just 37% of those surveyed expecting EM growth to accelerate over the next 12 months, down from 60% in July. They see tightening in the US and other developed markets as the single biggest risk to the EM outlook, with a large majority (81%) viewing Federal Reserve tapering as ‘slightly negative’ or ‘negative’ for EM.

At the same time, however, investors are more willing to deploy cash, with the number planning to cut their cash levels rising to 30%, up from 21% in July. Their risk appetite (measured on a scale from 0 to 10 where 10 means the greatest willingness to take risk) also rose to 6.59 from 6.17.

This suggests the valuations of some emerging markets assets have dropped to levels which have started to make them compelling to investors. Indeed, while the EM fundamentals look challenging, the technical picture is a lot more favourable. There has been a significant reduction in foreign holdings of local market debt and EM equities are trading at the deepest discount to developed markets since 2004. The modest pick-up in risk appetite supports the argument that investors are still looking out for opportunities where valuations are attractive.

Emerging market sentiment survey - November 2021 infographic

Investment strategies

Asia remains a favoured destination or EM investors, with 58% of those surveyed having an “overweight” position in the region. When it comes to individual asset classes, however, enthusiasm about the region has waned, with overall net sentiment scores – the difference between the share of survey respondents that see a region as having a more or less favourable outlook – now negative for Asian hard currency and local currency debt.

By contrast, Central and Eastern Europe (CEE) has a positive net sentiment score across all asset classes. Investors are particularly positive on FX and local currency debt in CEE. This may be down to the fact that this region is facing more overheating risk than stagflation, with good growth prospects and expectations that policymakers will deliver further tightening on top of already aggressive rate hikes.

Looking more generally at attitudes towards different asset classes, investors are downbeat on FX (aside from in CEE), with the proportion expecting a depreciation in EM FX at 51%, compared with 23% in July. In fixed income, investors increasingly prefer the relative safety of hard currency debt. Sentiment on EM equities has also deteriorated, with the proportion expecting EM equities to outperform developed world equities over the next three months at 35%, down from 46% in July.

The survey also polled investors on their attitudes to ESG investing against the backdrop of COP26 climate negotiations. Half of those surveyed said they plan to boost their investment in climate solutions in response to the discussions leading up to and during the Glasgow summit. Given the recent awareness of climate change issues via COP26 coverage, we are not surprised by this development.


First published 24 November 2021.

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