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Caution reigns – 7th Emerging Market Sentiment Survey
EM investors take a bearish view.
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Major investors are increasingly cautious about the outlook for emerging markets (EM) over the next three months amid a tough external environment, according to the latest HSBC EM Sentiment Survey.
The poll found that 30% of investors surveyed feel ‘bearish’, up from 27% in the November survey, with ‘bullish’ expectations falling to 21% from 27%. This means the net sentiment has turned negative for the first time since the series of surveys began nearly two years ago, and now stands in stark contrast to a strongly positive net sentiment score of 63% last January.
The survey is based on the responses of 105 investors from 102 institutions representing around USD517bn of EM assets under management, and was conducted between 18 January and 25 February 2022. This means the fieldwork was largely complete before the latest escalation of the conflict in Ukraine, although it appears investors were already discounting this risk factor, broadly speaking, with some shifts in sentiment across EM geographies evident in responses.
Fieldwork also coincided with speculation about future tightening by major central banks. Perhaps reflecting this, 60% of respondents saw the prospect of US Federal Reserve interest rate hikes and balance sheet reduction as the biggest risks for EM. Moreover, they think inflation could prove to be a persistent puzzle for major central banks: only 11% expect developed market inflation to revert to pre-pandemic levels.
Against this more challenging backdrop, they have further pared back their expectations on EM growth, with 45% of respondents now expecting EM activity to decelerate, outnumbering the 36% expecting it to accelerate.
Investors’ risk appetite (measured on a scale from 0 to 10, where 10 means the greatest willingness to take risk) has fallen to 5.75 from 6.59. This is the lowest reading since the survey began nearly two years ago. Respondents have also further boosted their cash holdings, with those that are holding 10% or more of their assets under management in cash rising significantly to 25% from 14% in November.
Strategy
Despite the overall bearish sentiment, however, investors continue to see some regions and asset classes as having brighter prospects – and their answers to questions on strategy suggest they have undertaken significant repositioning since the previous survey.
When it comes to regions, investors continue to value Asia’s relative stability, and favour bonds and foreign exchange in particular. They also have a favourable view on Latin America, perhaps because they see assets, and notably equities, as poised to benefit from rising commodity prices and potentially peaking inflation. There has been a shift away from Central and Eastern Europe, which was a region in favour previously in the November survey, perhaps on account of geopolitical risks.
Among different asset classes, the net sentiment for EM foreign exchange has weakened further to its lowest level, while hard currency debt remains in favour in EM fixed income. Sentiment on EM equities is neutral overall, with as many respondents expecting them to rise over the next three months as expect them to fall. Nonetheless, those expecting EM equities to outperform DM equities over the next three months (44%) slightly outnumber those expecting them to underperform (36%).
We also asked investors about their attitude to environmental, social and governance (ESG) issues. ESG engagement seems to have fallen back a little, with 33% of investors running an ESG portfolio either directly or indirectly, down from 45% in November. This could be attributed to a general tightening up of the language and definitions associated with what constitutes an “ESG portfolio”. Yet, the profile of climate change and extreme weather events picked up significantly, cited by 52% of the respondents (up from 39% in November) as the biggest environmental risks for emerging markets – perhaps a sign of last year’s COP26 summit drawing further attention to these issues.
First published 2nd March 2022.
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