Battered EM stocks could see turnaround soon

A COMBINATION of poor investor sentiment and expectations of continued economic stimulus suggest that battered emerging market equities could soon see a turnaround.

Continuing Us-china trade tensions and a slowing Chinese economy have dented investor sentiment in the past few months. The MSCI Emerging Markets Index is still down about 8% from this year’s high in mid-april. However, investors are saying that a potential bottoming out of risk-off sentiment and accommodative monetary and fiscal policies mean that flows could start coming back to developing countries.

An indicator of investor sentiment toward emerging market and Asia ex-japan stocks compiled by Bank of America Merrill Lynch remains in the “panic” zone. But that is good news if history is any guide.

Barring two instances, whenever the indicator has been at such low levels, the MSCI Asia ex-japan Index has delivered positive returns over the next 12 months, analysts led by Ritesh Samadhiya wrote in a note last week. The gauge is nearly 10% below its April high.

“The indicator has been pretty accurate in recent years,” said Nick Payne, head of global emerging markets at Merian Global Investors (UK) Ltd. “Emerging markets don’t seem to be popular with people and historically when it is out of favour, it has been a good time for investors to look at the markets.”

Barings LLC’S Christopher Smart agrees with Payne, stating that a recent leg-up in the yields of 10-year US Treasuries, seen as a safe haven, indicate low probability of a sharp recession in the US.

That, alongside strong US consumption, is a bullish sign for emerging stocks, the asset manager’s Bostonbased chief global strategist said during a visit to Singapore. — Bloomberg