International investors remain bullish about the outlook for emerging markets, despite concerns about recent equity market volatility and emerging market bond spreads that remain historically narrow, according to a new survey of fund managers by Standard & Poor’s, the leading provider of financial market intelligence.
The S&P Emerging Markets Sentiment Survey, which has been launched to regularly track trends and developments in emerging markets investing, gauges the views of over 150 leading global fund managers, who together account for over $500 billion in assets under management in emerging markets.
It found that 48% of investors are more positive about the outlook for emerging market stocks in the second half of 2007 than at present. Only 5% said they were more bearish. The survey also found that 51% are more positive about their outlook for local currency debt for the remainder of 2007, compared to only 32% for external currency debt.
73% of fund managers said they expected their assets under management in emerging market securities to increase by the year-end, while only 4% predicted a decrease.
However, the survey suggests growing wariness about the outlook for Asian emerging markets, following the dramatic gains made by Chinese and Indian financial markets in the last 12 months and their recent volatility. 56% of fund managers said that Latin American markets now offer the most attractive opportunities, compared with 53% citing Asian markets. 29% said emerging European markets were most attractive.
“Fund managers are demonstrating some fatigue with Asian markets and appear to be rotating into other regions, especially Latin America, where relative value may be more appealing,” said Standard & Poor’s chief economist David Wyss. “It is nonetheless striking how positive they remain about emerging markets in general, despite the bull run we have seen in both emerging market debt and equities.”
Bullish investors said their expectations were underpinned by attractive yields and valuations, a positive outlook for local economies, and the bulwark of large foreign currency reserves in many emerging markets.
Investors cited uncertainty about the direction of the
“With liquidity continuing to flow towards emerging markets, the concerns that fund managers have about risks seem to be comfortably outweighed by the opportunities they continue to see in these markets,” Wyss noted. “Our survey suggests the momentum is still firmly with emerging markets.”
Emerging market debt, despite record low spreads relative to US treasury bonds, is still viewed as attractive by most fund managers. More than half (53%) said their allocation to emerging markets debt would increase by the end of the year, while only 4% said they expected it to decline. The majority of investors expect at most only limited widening in spreads.
The survey suggests that local currency emerging markets debt is growing in popularity relative to traditional dollar and euro denominated bonds, with 24% of fund managers saying at least half their emerging market debt portfolios now comprises local currency securities. However, only about one-fifth of debt investors said they had more than 50% of their emerging markets portfolio in corporate debt, reflecting the relatively low level of corporate bond issuance in most emerging markets.
The survey also highlights the growing use of credit derivatives by emerging market investors, with about half of fund managers currently participating in the emerging markets credit default swaps market as either a buyer or seller of protection.
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