HSBC Emerging Markets Sentiment Survey – Investors play the waiting game

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

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Emerging market (EM) investors have become less bullish about EM prospects since the start of the year as inflation worries grow, according to our latest EM Sentiment Survey.

Just 34 per cent of the investors we surveyed feel bullish about EM prospects over the next three months, down from 73 per cent at the turn of the year. Nearly half have now adopted a neutral stance and increased the proportion of cash in their portfolios during the first quarter of the year. Only 21 per cent plan to put that cash to work in the near term.

Although 2021 started with great expectations, the heightened volatility in the first quarter and a shakier global macro backdrop have made it difficult for investors to have a strong medium-term view.

To add to these challenges, nearly half of the investors identify inflation and higher rates in the US and globally as the most prominent risk to the EM outlook.

Our latest quarterly poll – the fourth of its kind in a series first launched in June 2020 – surveyed 164 investors from 152 institutions representing USD575 billion of EM assets under management between March 9 and April 22.

Some 77 per cent of survey respondents expect higher inflation in EM over the next 12 months, while 38 per cent expect EM policy rates to go up over the next three months. The survey also shows that investor risk appetite, measured on a scale of 0-10 where 10 is the highest risk, has also fallen to 6.04, down from 6.86 in January.

Signs of increasing hesitation among investors come after a resurgence in COVID-19 cases in economies such as India and Brazil. Yet inflation – in the US and globally – has now overtaken COVID-19 as the biggest perceived challenge to EM prospects, with 48 per cent of investors citing it as a major risk.

This may reflect fears that reflation and a potential tapering of asset purchases by central banks might lead to a sell-off in EM assets, similar to the ‘taper tantrum’ of 2013. Although we do not rule out a rise in financial market volatility, particularly if financial conditions were to tighten on the back of tapering decisions, there are significant fundamental differences that we believe could shield EM assets to some extent.

Against today’s more uncertain backdrop, EM investors appear to be flocking back to Asia’s relative stability. Net sentiment remains positive for Asia across all asset classes. Latam is the only region to have negative net sentiment scores across all asset classes.

The latest survey shows a significant reduction in fixed income positions. Optimism about FX has also waned, with only 22 per cent of survey respondents, compared with 58 per cent in the previous survey, expecting EM FX to appreciate against the US dollar over the next three months.

The picture is more mixed in equities, with 50 per cent expecting EM equities to move higher in the next 3 months and 51 per cent expecting them to outperform developed market equities.

We also asked respondents about their attitudes to Environmental, Social and Governance (ESG) aspects of their investment decisions. The ranking of the ESG key risks remains as climate change, inequality and minority shareholder protection, but the April survey also shows that “water pollution and scarcity” has gained increasing attention as an environmental risk. It is encouraging to see investors engaging with ESG issues in a more expansive way.

First published 28 January 2021

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