Emerging market investors bide time

Our survey shows funds are cash rich but not yet ready to invest

29 July 2021 Dr Murat Ulgen, Global Head of Emerging Markets Research

Fund managers are neutral on emerging-market prospects in the near-term, though with a bullish bias: but despite holding high levels of cash they are not yet investing, according to our latest survey. They see interest rates and inflation rising while economic improvement slows.

That 59 per cent of investors are willing to keep those high cash balances unchanged in the near term suggests that while still looking for opportunities in emerging economies, they remain concerned about potential tightening by the US Federal Reserve, inflation and COVID-19.

Only 60 per cent of respondents see emerging-market economic activity improving over the next year – down from 73 per cent in our April survey and 89 per cent in January: and 8 per cent anticipate slower growth.

Half have a neutral investment view for the next three months, little changed since April, but 40 per cent are now bullish, up from 34 per cent. The balance is similar to September 2020, but with a comparatively lower risk appetite.

The latest survey – our fifth – questioned 124 investors during June and July from 119 institutions managing USD506 billion of emerging-market assets. It found they have reduced their overweight positions in fixed-income markets but are more overweight in equities and currencies.

Emerging market investors bide time - Infographic (PDF, 68KB)

The proportion of funds overweight in shares has risen from 57 per cent to 69 per cent since April but investors continue to move away from Asia, possibly because of rising COVID-19 cases and slow vaccination rates. In January, 70 per cent of funds were overweight in Asia; that fell to 53 per cent in April and is now just 43 per cent.

Investors’ preferences are shifting towards commodity-linked regions such as Latin America, the Middle East and Africa.

Some 36 per cent say the major risk to emerging markets is tighter monetary policy in developed countries, especially the US. They worry that the Fed’s new stance could lead to a sell-off in emerging-market assets similar to the ‘taper tantrum’ of 2013.

But despite concerns about the global impact of rising COVID-19 cases, 68 per cent of respondents – up from 42 per cent in April – say the world economy is already recovering from the pandemic and fewer expect the upturn to be delayed.

Asia remains the region with the best recovery prospects, though even here, those expecting growth to increase fell from 54 per cent to 46 per cent.

While economists forecast continued price pressures across emerging markets, only 59 per cent of our respondents now expect rising inflation, down from 77 per cent in April. Latin America, particularly Argentina and Brazil, are expected to have a deteriorating inflation outlook, as is Africa; however, price pressures are expected to slow in the Middle East, eastern Europe and Asia, including mainland China.

Some emerging economies are already raising interest rates as inflation rises. Of our survey, 56 per cent expect higher policy rates, up from 38 per cent in April, with none forecasting cuts.

Asia is still favoured most across all asset classes, albeit now to a lesser extent, suggesting investors are looking elsewhere such as the commodity-linked regions. Despite more investors expecting emerging-economies’ share markets to rise, fewer think they will outperform developed countries’.

Some 40 per cent of respondents see emerging-market currencies appreciating against the US dollar over the next three months, preferring currencies of countries that are raising rates more rapidly.

First published 29th July 2021.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure

More, collapsed
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.