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Waiting in the wings - HSBC Emerging Markets Sentiment Survey

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Investors seem to be undecided about the prospects for emerging markets (EM) going into the New Year, according to HSBC’s 14th EM Sentiment Survey.

Some 55% of the respondents felt “neutral”, the highest in the survey’s near four-year history, up from 43% in September. Meanwhile, 32% felt “bullish” about EM, down from 37%, while the proportion feeling “bearish” fell to 8% from 20%. On a net basis, investors still maintain a constructive bias on EM as an asset class.

Graph showcasing the findings of HSBC’s 14th Emerging Markets Sentiment Survey, with 55% of the respondents turning “neutral” vs 43% previously, 32% feeling “bullish” about EM vs 37% in the last survey,  and 8% feeling “bearish” vs 20% before

EM investors appear to be holding on to their large cash piles, with the weighted average cash level falling marginally to 5.6% from 5.7%. Their risk appetite score, measured on a scale where “0” is “no risk” and “10” is “highest risk in EM”, remains the same at 6.3 on a weighted average basis.

Infographic showing that the share of investors holding more than 10% of their portfolio in cash has declined slightly to 21% from 28% in the previous survey.

The emergence of a neutral camp, high cash levels, and a solid risk appetite tell us that investors are still looking for opportunities in the EM universe – but they are not yet ready to take action ahead of a crowded election cycle in 2024.

Infographic showing the weighted average risk appetite for respondents of HSBC’s 14th Emerging Markets Sentiment Survey remain unchanged at 6.3

The survey was conducted between 30 October and 8 December 2023 among 101 investors from 96 institutions representing USD419bn of EM assets under management. The fieldwork coincided with a generally positive mood as markets were pricing in a “goldilocks outlook” for major economies, with growth holding up, inflation falling, and rate cuts from major central banks approaching.

But investors are also alive to risks: the possibility of recession in major economics, cited by 38% of respondents, continues to top the list. Worries about interest rates staying higher for longer have diminished (down to 24%, from 29%), while fears about geopolitical risks have risen (up to 23%, from 17%). Some 36% of respondents think that oil prices could prove higher over the next 12 months than average forecasts currently suggest, outnumbering those (22%) who think that food inflation could surprise to the upside.

Top upsides are Rate cuts by major central banks (27%) and  Easing of geopolitical tensions (23%); whereas biggest downside risks are Recession in major economies (38%) and Fed/DM interest rates higher/longer than expected (24%)

On a more positive note, investors continue to see the potential rate cuts by major central banks as key upside risk to the EM outlook. A clear majority expect EM inflation to fall over the next 12 months. And when it comes to prospects for EM growth, while expectations have moderated somewhat, net sentiment remains positive at 9%.


What does this backdrop mean for investors’ positioning and plans? Our survey shows that their ranking of the regions has not changed much throughout the year. Latin America is still the favourite region with positive net sentiment scores across all asset classes, though Asia stands out as the preferred region in equities. Asia is also seen as the region with the strongest prospects for economic growth over the next 12 months.

EM FX sentiment has been dampened further. On EM fixed income, the preference is still for local currency over hard currency debt but a sizable 26% of the investors now like both, up from zero last time. Investors are split as to whether EM equities will move higher or sideways over the next three months, but they are still expected to outperform developed market equities.

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