A tactical opportunity?
Robin Johnson, head of portfolio management at Morningstar Investment Management EMEA, believes that a shift in sentiment toward emerging markets is likely to come only once the Fed finally raises interest rates.
“People purport to know what the impact of a rate rise will be, but we have never been here before. And, I think that is still holding a lot of people back,” he told Portfolio Adviser.
That said, Morningstar has been and remains overweight emerging markets. “It has hurt us recently, but there are definite asset allocation benefits to including exposure to emerging markets,” Johnson says, adding that the firm has no plans to get out of the positions.
At the other end of the spectrum, however, is Mark Harris, head of multi asset, City Financial. While he remains cautious about the longer term dynamics within the region, he says: “A number of emerging market equities and currencies have now suffered a full blown bear market correction. Given the extent of the bad news, they have now become extremely sensitive to a marginal positive change.”
As a result of this, he says, a tactical opportunity for significant rewards could occur soon, if the necessary catalysts – read a shift from dollar strength to dollar weakness – fall into place.
Portfolio Adviser has written before about the capitulation of emerging markets and the prospects for recovery. And, while there is absolutely no way to know what is going to happen, it is worth bearing two things in mind.
The first, as Harris points out, is that the strong dollar trade is one of the more crowded trades currently. And, secondly, as Liberum pointed out in a note about Ashmore, emerging market flows can be subject to wild swings.
There is no doubt that Chinese growth remains a concern, as does the actual impact of a rate hike in the US, when it comes. But, it does feel very much like the sands of sentiment may be beginning slowly to move.
