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Big falls in stock markets always prompt the question – is now the time to jump back in? This month’s major drops in global equities – not least of all in emerging markets – offer a welcome chance to revisit.
If emerging economies are going to keep growing, surely the sell-off is overdone?
Neat timing then for Jonathan Garner at Morgan Stanley to release an update to the bank’s model EM portfolio. The verdict? Get buying.
Garner points to a whole host of pricing indicators which suggest emerging market equities are set for a rally – with current price/earnings and price/book ratios sitting well below long-running averages.
In fact, Garner has raised the allocation to EM equities to its highest level since April 2009 (i.e. just after the post-Lehman market bottom). Pile in then, right?
There is, even in this relatively bullish update, a quiet note of caution. Along with the increased equity allocation comes a new ‘scenario’ – a fourth added to ‘Bull’, ‘Base’, and ‘Bear’ cases that previously signaled the boundaries of the likely. It goes by the grizzly-sounding name ‘Extreme Bear’.
We introduce the extreme bear case scenario which involves an increase in the severity of our current bear case to include a U.S. double dip & worsening of the Eurozone sovereign debt crisis materially impacting Asia / EM growth.
While only 10 per cent ‘likely’, according to MS, this Polar Bear Scenario is still more likely than their Bull case.
HSBC’s Pablo Goldberg, meanwhile, isn’t quite ready to dive back in.
Risk aversion wins for now. Hence we expect the performance of emerging markets to remain hostage to developments outside the asset class. A dramatic sell-off in US equities put global investors on the defensive, an attitude that spilled over EM. The past weeks confirmed our fears that investors face significant asymmetric payoffs: small gains in good times but large losses in the bad times.
Given the uncertainties, we retain our cautious approach to EM assets. Appetite for EM risk is likely to remain subdued until we get more clarity on some of the known unknowns in the developed markets.
So it depends which overused adage appeals the most: ‘Fortune favours the bold’ or ‘fools rush in’…
Related reading: Money market and EM local currency funds: the only places left to hide, beyondbrics EM bonds: safe haven no more?, beyondbrics
World Bank gives hope to holdouts
China: inflating away debt
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