Investors warm up to emerging markets

HSBC survey finds caution about economic recovery in emerging markets

25 September 2020 Dr Murat Ulgen, Global Head of Emerging Markets Research

Investors are more confident about emerging markets (EM) than they were three months ago, according to the latest HSBC Emerging Markets Investor Sentiment Survey.

Nearly half of the 211 investors surveyed are ‘bullish’ about EM prospects over the next three months, up from just a quarter in June.

The survey, the second of its kind, was conducted between 11 August and 15 September. Investors from 195 institutions representing around USD650 billion of assets under management in EM gave their views on the outlook for different markets.

As well as having a more positive view on EM in the short term, the majority (71 per cent) expect EM growth to improve over the next 12 months, compared with just 37 per cent in June.

They also expect accommodative EM policy rates – currently at record or near-record lows – to stay broadly the same.

Against this backdrop, investors’ risk appetite has grown modestly. The survey asked investors how much risk they are willing to take at the moment, where 0 is ‘no risk’ and 10 is ‘highest risk’. The average score is 6.46, a modest rise from 5.97 in June.

A growing appetite for risk is also reflected in attitudes towards cash. Many investors increased their cash holdings during the coronavirus pandemic as turbulence affected multiple asset classes.

While respondents to our survey have still relatively high cash holdings now, nearly one-third now expect to put more cash to work in the near term and invest in EM financial assets. Only 11 per cent expect to increase their cash holdings.

Strategy

The survey also asked investors for their views on different asset classes and regions.

Investors said they see Asia as the region with the most favourable outlook across all asset classes – FX, rates, equity and credit – and with the best prospects for economic growth. They see Latin America as having the least favourable outlook overall.

Fewer investors think EM currencies will depreciate against the US dollar compared with the June survey, though the proportion of respondents expecting appreciation has increased only by 3 percentage points to 31 per cent. In fixed income, slightly more investors favour local markets now over hard currency debt.

In equities, there is a sharp turnaround in sentiment. The proportion of respondents expecting EM equity markets to improve has nearly doubled to 67 per cent compared with 36 per cent in the June survey.

And when assessing the outlook for EM and developed markets (DM), 55 per cent expect EM equities to outperform DM over the next three months. This contrasts with the results of the June survey, when 47 per cent expected EM to underperform.

ESG on the rise

The survey also shows the rising profile of environmental, social and governance (ESG) issues for EM investors. Nearly 40 per cent of respondents now say they run an ESG portfolio directly, partly or indirectly, up from 30 per cent in June.

Climate change, inequality, and minority shareholder protection are seen as the key ESG risks.

As our Global Research team sees a sustained uptick in demand for ESG advice from clients in EMs, we expect the numbers actively engaged in ESG investing to increase in the future.

EM Sentiment Survey 2: key data (PDF, 76KB)

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

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