Portuguese fund selectors plan return to EM

21 May 2014

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PA Europe

Earlier this year, Expert Investor Europe research already showed appetite for emerging market equities and bonds alike is rebounding quite strongly in France, Finland and Germany.

While European equities remain the most popular asset class among Portugal’s fund buyers, with the number of buyers only slightly down compared to October last year, emerging market equities are now the second most popular asset class. Some 43% of fund selectors will increase their exposure in the coming 12 months, up from 27% in January. Portuguese fund selectors seem to target Latin-America specifically, as their appetite for Asian equities is considerably lower.

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Japan and US: abandoning the ship

So EM equity sentiment is on the rise again after enthusiasm had decreased in the latter half of last year, but appetite for US and Japanese stocks has gone down sharply. The Portuguese have obviously lost their confidence in Abenomics, as sentiment slipped into clear negative territory. Four in ten fund selectors will decrease their allocation or have stopped using the asset class at all. In January, only 8% were decreasing and all interviewed fund selectors were invested in Japanese stocks.

Conflicting client bond bias

As emerging market stocks are gaining ground at the expense of developed market equities (excluding Europe), the same story goes for bonds. While Portuguese investors prefer sticking to the asset class (link), fund selectors are as consistent in their aversion to developed market bonds. For more than 1.5 years, the majority of Portugal’s fund buyers have said they are selling out of government bonds. Appetite for corporate bonds is now almost on par with that for government loans, with only 3% increasing their allocation and 46% lowering their allocation or not using the asset class at all.

Emerging market debt as a bond alternative

Absolute return is not as popular in Portugal as in many other European countries, but investors are finding their way back to emerging market debt (EMD) in their search for yield. Though sentiment is still net negative for government as well as corporate EMD, approximately a quarter of Portuguese fund selectors say they will step up allocation during the next year. Meanwhile, high yield bonds remain comparatively attractive as well, with a third increasing their allocation.