HSBC EM Sentiment Survey

Investors sceptical about the rebound

15 June 2020 Dr Murat Ulgen, Global Head of Emerging Markets Research

Emerging-markets investors have high cash balances and only a modest risk-appetite currently according to HSBC’s inaugural quarterly EM Sentiment Survey. Only 23 per cent are bullish about the sector’s prospects over the next three months and almost half think economic recovery will be delayed until 2021.

While growth returns and inflation falls in Asia, asset managers expect the opposite in Latin America. Investors are generally underweight in Africa, Middle East, less so in Latin America, but neutral to overweight in Asia and Central & Eastern Europe Some 213 investors from 198 worldwide institutions managing more than $600 billion of assets were surveyed in the three weeks to 2 June. But even though emerging markets had already recouped part of their coronavirus-related losses, 38 per cent were bearish with almost as many neutral.

On a 0-to-10 scale of the risk investors will take in emerging markets, the weighted-average was just 5.97. This risk aversion applies to equities, currencies, commodities and local-currency debt but half the managers are overweight in the lower-risk emerging-market sovereign credit.

Cash comprises more than 5 per cent of assets for half the managers and 51 per cent plan no near-term change. There is thus cash to invest once confidence returns.

However, for the moment, while 44 per cent of surveyed managers see economic recovery in emerging markets later this year, 47 per cent expect further deterioration over the next 12 months. Although 68 per cent forecast a swift recovery in Asia, led by China, Vietnam and Korea, investors expect deceleration and higher inflation in Africa, the Middle East and Latin America, especially Argentina. Inflation is expected to fall in Asia and Central & Eastern Europe.

Recession is cited as the biggest risk for emerging markets, ahead of COVID-19 and a sovereign credit or liquidity crunch, and two-thirds of investors think central banks will cut interest rates further before September.

Only 28 per cent of asset managers expect emerging-market currencies to strengthen over the next three months compared with 44 per cent expecting depreciation. Asian currencies have most support but sentiment is negative for Central & Eastern Europe, Africa, and Latin America. The Mexican peso and Chinese renminbi were named as having the most favourable outlook and the Argentine peso as the least – though the Brazilian real appears on both lists.

Hard-currency debt is preferred to local-currency bonds – 45 per cent to 33 per cent. China, Russia and Korea top investors’ local-currency choices with Indonesia also a hard-currency favourite, but in both categories, Argentina, Brazil and Turkey are least favoured.

On sovereign credit, 42 per cent of investors plan to be overweight in Asia but most other regions had a majority underweight.

Some 36 per cent of investors think emerging-market equities will appreciate over the next three months though 47 per cent expect them to underperform developed-world shares.

Mainland China, Korea and Taiwan have support but the 7 per cent with a positive view of Middle East shares were far outweighed by 33 per cent giving a negative opinion. There were negative views on India, Brazil and Turkey too. Some 45 per cent of managers plan to be overweight in Asian equities but underweight positions prevail in most other regions.

Although emerging markets focus less on environmental, social and governance issues than some developed countries, our survey identified key risks as climate change, inequality and minority-shareholder protection.

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