According to the latest investor sentiment data collected by Expert Investor in June, more than four in 10 investors across Europe intend to raise their allocation in the next 12 months, while less than one in 10 are planning to decrease their exposure. The last time investors were this bullish was in the summer of 2014.
Robert Schuckink-Kool, chief investment officer of the private bank Wijs & Van Oostveen in Amsterdam, is one of these EM optimists. “Though we are generally underweight equities, we are very positive about EM stocks,” he says. “After a recent increase in our allocation, some of our clients have more than half of their equity exposure in emerging markets now.”
Even though many fund buyers share Schuckink-Kool’s optimism, many have yet to put their words into action. On previous occasions, buoyant EM equity sentiment has been accompanied with strong net inflows into the asset class. But even though sentiment has been robust for two consecutive quarters now, money has yet to flow into EM equities in substantial amounts (see chart above).
The Brexit catalyst
Investors seem to wait for a catalyst, and they very well have been given one a couple of weeks ago in the form of Brexit.
“With regards to the impact of Brexit, increased political uncertainty has had the quixotic effect of aiding a recovery in emerging markets in the short term,” says William Ballard, head of EM equities at Aviva Investors in London. The Brexit vote has prompted central banks in developed markets, not least the Fed, to keep rates low for longer, and this has provided emerging markets with the opportunity to lower interest rates and stimulate growth without having to worry about depreciating currencies, Ballard notes. In fact, EM currencies are up over 3% against the dollar since the vote, according to the Institute of International Finance.
This suggests that emerging market equities, traditionally one of the asset classes with the highest volatility, are now considered a relatively safe bet, compared to developed market stocks. “Our risk analysis indeed shows that the relative strength of EM versus DM is increasing. The last time we found EM equities as attractive compared to developed market equities as now was in 2010,” says Schuckink-Kool.
Just add the discount emerging market equities are still trading on to the equation, and it becomes clear that the Brexiteers, who threw an entire continent into disarray with their vote to leave the European Union, can be credited with introducing at least one element of (near) certainty: investors will increase their allocations to emerging markets in the months to come.
