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Seeking a catalyst

HSBC EM Sentiment Survey.

Investor confidence in emerging markets has hit a new low as fears of a global recession rise, according to the latest HSBC EM Sentiment Survey.

Some 41% of investors feel bearish about the outlook for EM for the next three months, up from 38% in our June poll. Just 15% feel bullish, giving an overall net sentiment score of minus 26 – the lowest since our surveys began more than two years ago.

Investors have increased their bearish expectations - the highest level since the start of the survey

And while tighter monetary policy from central banks remains a key concern, investors now see the possibility of recession in major economies as the single biggest risk to the outlook for emerging markets. Almost all of those surveyed think that eurozone will go into recession over the next two years. For the US, the equivalent figure is 84%, and more than half expect the global economy to enter recession.

Investors now see recession as the major risk

The poll was conducted between 2 August and 23 September among 110 investors from 109 institutions representing USD458bn of EM assets under management. Fieldwork coincided with a period of volatility in global markets driven by speculation that the US Federal Reserve might ‘pivot’ towards a less restrictive monetary policy, followed by a slump in risk assets as the central bank reaffirmed its hawkish stance.

Many respondents expect that central banks will continue to contend with high inflation for years to come. Around half think it will take at least two years for the US to get back to its target of 2% annual inflation, with a small number (10%) thinking it may never do so.

Against this challenging backdrop, investor risk appetite – measured on a scale where 0 is “no risk” and 10 is “highest risk” – fell further to 5.26 from 5.70, another new low.

Investor "risk appetite" remains muted

Consistent with the cautious mood, investors continue to hold relatively high levels of cash. The weighted average of cash holdings in their portfolio stands at 6.6%, a new high, up from 6.5% in June. Yet the number of investors looking to deploy cash has also risen slightly – suggesting some are seeking a catalyst to put their vast cash pile to work.

Cash levels remain sizeable


In volatile times, investors often express a preference for Asia’s perceived stability, and the survey suggests this is the case today. The region shows net positive sentiment across all asset classes. Latin America is the next most favoured region overall, while Central and Eastern Europe remains the least, most likely because of its exposure to the Russia-Ukraine war and eurozone slowdown.

Sentiment on local currencies is firmly negative, a finding which no doubt reflects the recent strength of the US dollar. In fixed income, investors continue to prefer hard currency debt over local currency debt. They have also become more bullish about EM equities compared with our June survey, particularly equities in Asia and the Middle East.

As usual, we asked respondents about their attitudes towards environmental, social and governance (ESG) investing. A total of 23% say they currently run ESG portfolio directly. While this is slightly down on the 29% in our June poll, it is the second highest figure in the survey to date – and suggests that ESG is continuing its gradual move into the mainstream for EM investors.

Slight fall in respondents directly running ESG portfolios, "integration" most common across holdings

First published 27th September 2022.

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