Stocks and currencies took a hit, with MSCI’s equity index posting its biggest weekly decline in six years, and bond yields rose. Even so, money managers at firms including Pacific Investment Management Co, Barings LLC and T Rowe Price Group Inc argue that the long-term case for emerging markets remains. While some are tweaking portfolios in the margins, most are holding off on major changes for now.
Their confidence hinges on what investors see as the main drivers behind the rally in emerging markets: a push to diversify away from U.S. assets, attractive valuations and strong economic growth. Many believe that these themes will reassert themselves once the geopolitical shock subsides, and fund flows suggest that investors are taking advantage of falling rates to buy more securities. Investors added $12.6 billion to emerging market stocks and bonds in the week through Wednesday, according to a Bank of America Corp. report, citing EPFR Global data.
“We’re looking forward to more clarity,” said Nick Eisinger, head of EM sovereign credit strategy at JPMorgan Asset Management. “We like a lot of foundational stories in EM, but unfortunately foundational stories don’t really count for much right now, so we need this shot.”
Still, risks are rising, with Brent crude oil surging above $90 a barrel and conflicts in the Middle East escalating in intensity. The concern is that rising oil prices will depress economic growth in countries that rely on imports. Also, a stronger dollar – which has re-emerged as the haven trade of choice – is tightening financial conditions and boosting returns for emerging market investors.
JPMorgan Chase & Co cut its recommendations on emerging market assets three times in the past week, with uncertainty clouding the outlook for the asset class. The bank’s strategists cut back on calls for market weights on foreign currencies and local rates, and went tactically underweight on sovereign and corporate dollar bonds.
(TagsToTranslate)Emerging markets
