Asset management firm downgrades outlook on developing economies

JOHANNESBURG - The world’s largest asset manager has downgraded its outlook on emerging markets, including South Africa, choosing to be more neutral than bullish on developing economies’ equity markets.

BlackRock, which held its midyear outlook last week, also downgraded emerging market debt and currencies from overweight to neutral.

“We’re downgrading emerging market equities across the board from overweight to neutral, and that includes

China, and that includes South Africa,” said Li Wei, MD and global chief investment strategist at the BlackRock Investment Institute.

Li said while emerging markets are currently enjoying tailwinds like commodity prices boom, those are being finely balanced by headwinds like the heightened US dollar volatility. The asset manager also expects a monetary tightening cycle in the emerging markets as many struggle with runaway inflation.

She said there is also a “bigger question mark” about the depth of structural scars that Covid-19 has left behind in these markets.

“Specifically in the context of South Africa, we don’t have a country coverage view. But the comments that I made apply to South Africa as well in terms of the direction of policy. The next move seems to be more towards tightening potentially.

“Also, if you think about the degree of the lockdown, it’s moving in a direction the opposite of what we’re experiencing in the developed world,” said Li.

But at least for now, BlackRock has only chosen to be neutral on emerging markets. It could have chosen to be underweight in its outlook, a move that could drive some investors out of emerging economies’ stock markets.

Li said BlackRock did not expect to downgrade emerging markets to underweight. But it will be looking closely at how the Covid-19 Delta variant affects different emerging markets.