‘Hold’ got the majority of votes for all but two asset classes, while the enthusiasm for emerging markets which had been registered in September has receded. The overall undecidedness is a reflection of the Finns’ uncertain macroeconomic outlook, which has in turn been triggered by the sluggish domestic economy and the ongoing conflict between Russia and the West.
Their extremely uncertain investment outlook does not drive the Finns to allocate more to long/short strategies though. Less than 10% of Finland’s fund selectors is planning to step up exposure to alternative Ucits equities, while about half of them don’t even have exposure to the asset class.
Risks are looming
The number of buyers for emerging market equities and government bonds has come down markedly, though EMD is still the most popular fixed income asset class by some distance. EM stocks are still the best-loved equity category too, albeit by a narrow margin. The decreased appetite is understandable, as a systemic rise in correlation between fixed income asset classes is one of the biggest market risks at the moment, says Ardra Belitz, who manages an EM currency strategy fund for Lazard and spoke at last Thursday’s conference.
“The risk is there that there will be no differentiation on a systemic basis anymore, and a loss of confidence by institutional investors is the biggest risk of all,” she said.
The main trigger for an increase in correlation would obviously be the occurrence of some major geopolitical events. And there are some obvious candidates. “My fundamental concern is Europe, which is in a very fragile state,” says Amanda Stitt, a bond fund manager for Legg Mason.
Reeling the EM rocks
Within emerging markets, there is a mix of serious downside risks as well, but also some great 
opportunities. The recent re-election of Dilma Rousseff as Brazilian president was a major setback for Robert Secker (pictured right) and his M&G Global Emerging Markets Fund, which has an overweight in Brazil.
“Flip-flopping of policies are her trademark, and this is difficult for companies we own”, he said. Brazil is not the online emerging market which deserves close monitoring. Nowhere are valuation gaps as big as within this asset class. Although EM equities as a whole are now at their cheapest since the dot-com boom in the early 2000s compared to their developed peers, there are some serious bubbles within the asset class. “In India, there are some very expensive companies which are on valuations that don’t make any economic sense,” said Secker. “Supermarkets in EM are in a bubble as well, but in other markets and sectors you’ve got some incredibly cheap businesses.”
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