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.