Emerging market equities have undergone a dramatic shift since the financial crisis. Having topped the popularity rankings in 2009 and 2010, developing country stocks are now less in favour than at any time in a decade.
According to Bank of America Merrill Lynch’s widely followed monthly survey of global investors, asset allocators currently have their largest underweight position in emerging market shares since 2001. And sentiment towards this market segment is apparently getting worse: August’s survey results showed a sixth successive monthly worsening of investors’ perceptions of emerging market equities.
Fund flow figures reflect the shift in investors’ mood. One of the largest US-listed developing stock index tracker funds, iShares’ $36 billion (€27billion) MSCI Emerging Markets ETF, lost over a quarter of its assets between February and June.
And in Europe, according to Virtu Financial, emerging market equity ETFs saw six successive months of outflows between February and July.
Emerging market economies are being forced to face up to a period of painful readjustment, Han Dieperink, chief investment officer of Rabobank Private Banking, told IndexUniverse.eu.
“A comparison can be made between the current period of emerging market underperformance and the late 1990s, when we saw the negative effect of rising US bond yields,” said Dieperink.
“The current unwinding of US quantitative easing, which means higher real interest rates and a stronger US dollar, China’s deleveraging and decreasing credit growth in some economies means that less money is now flowing into emerging markets,” Dieperink continued.
“The emerging market debt bubble has burst, equities are also being hurt and local currencies are under pressure. The solution is to reform, but that will hurt economic performance in the short term. While many are talking about structural reforms, the willingness or the ability to deliver is in short supply,” he said.
The violent May-June sell-off in emerging market bonds took average yields up by 2percent, from below 5percent to over 7percent, according to one estimate. Meanwhile, domestic currencies have recently been on the slide against the dollar in Russia, Brazil and, most notably, India, where the central bank last week imposed new capital controls in an attempt to stem weakness in the rupee.
The tailwind promised to emerging market stock investors by the commodity price boom is now a thing of the past, Allan Lane, managing partner at London-based twenty20 Investments, told IndexUniverse.eu.
“Post-2008, with many economies suffering under a mountain of debt, it seemed the only ticket in town was the commodity bull market,” said Lane. “But all of a sudden the world seems a different place. Bullish headlines for the UK’s economy and housing market and encouraging GDP figures in France and Germany suggest Europe is pulling out of recession. Just as many emerging markets show signs of economic fatigue, the West is coming to the rescue.”
Samu Lang, chief investment officer at Finland’s Taalerithehdas Asset Management, agrees. However, say Lang, the reorientation of emerging market economies from raw material production to greater consumer demand may not necessarily benefit companies in those countries.
“It looks as though the commodity-producing theme, which lasted for over 10 years, ended in 2008,” Lang told IndexUniverse.eu.
“Now it’s more about changes in growth dynamics, that is, people getting comparatively wealthier in Asia,” Lang added. “But growing consumer demand should probably not be played via emerging market equities but, for example, via western companies which are most geared to this theme. A wealthier Asian will not buy a Chinese car or handbag. He’ll buy a BMW or a Gucci.”
But following recent weakness, other investors are taking a contrarian, overtly bullish stance on emerging market stocks.