Dubai: More investment managers and financial advisers have a positive outlook on emerging markets despite 30 per cent gains in the MSCI emerging markets index, a poll revealed.

According to Columbia Threadneedle Investments poll of 100 professionals, about 57 per cent of the respondents were optimistic on emerging markets compared to 45 per cent a year earlier, with 43 per cent of respondents planning to increase their emerging markets allocation over the next 12 months.

“We are once again seeing investors demonstrate a strong level of interest and a positive emerging markets outlook for the year ahead,” said Marc Zeitoun, Head of Strategic Beta at Columbia Threadneedle Investments.

“Understanding the main drivers of growth in these markets continues to be a critical element for investors hoping to realise the full potential of the emerging markets in 2018 and beyond,” Zeitoun said.

The Columbia Threadneedle Investments EM Investor Sentiment Gauge is at 760 out of 1,000 for this latest poll, a 21 per cent increase from fourth quarter of 2016 and a 54 per cent increase from fourth quarter of 2015.

The majority (62 per cent) of survey respondents say their current allocation to EM is about the same or higher than 12 months ago, with only seven per cent lowering their allocation versus 15 per cent of respondents at the end of 2016. Most respondents currently have either one-to-five per cent (40 per cent) or five-to-10 per cent (31 per cent) allocation in emerging markets, the survey revealed.

Chinese markets

Among the emerging markets, institutional investors are slowly taking note of Chinese markets on the back of expectations of its inclusion in the MSCI emerging market index, according to Julius Baer.

“China is too big a market to ignore and it is the second last market in the world after the US. You cannot treat it as a tactical allocation in any typical global portfolio anymore. Increasingly they are viewing as the part of their core portfolio,” Mark Shirreff Matthews, Head Research Asia, Bank Julius Baer told Gulf News.

The Shanghai Stock Exchange Composite Index gained nearly 15 per cent in 2017, compared to a near 30 per cent gains in the MSCI emerging market index, indicating underperformance in the Chinese index.

Currently there are many factors working in faour of the Chinese market that is reduced level of debt along with expectations of more reforms from the government.

“There was a wall of ill-will towards China principally over the high level of debt and oversupply of property and perception of no transparency in the government. There has been some an improvement in all three, the debt level has come down as a per cent of GDP, they continue to de-leverage, supply in property sector has also been controlled further,” Matthews said.

“There has been an obvious increase in the fund flows from foreigners into China. I don’t think US markets are over-valued relative to inflation and interest rate. The 18 times is approximately the right price and I don’t think they are undervalued either. The A shares in Hong Kong are 9.5 times valued, so half of the price of US and with 3.3 per cent dividend yields,” Matthews added.

Julius Baer feels that for a country which is improving on many counts like debt, reforms among others, “trading on half the valuation of the US is unwarranted, and it should be higher.”

Indian markets

Axis Asset Management is positive on Indian markets over the medium to long term as they expect the earnings cycle to kick in over the next couple of years.

“Going forward, we remain constructive on stock ideas in our portfolio which will benefit from competitive strengths and tailwinds from the government push to improve rural incomes,” Ashwin Patni, Fund Manager, Axis Asset Management, said in a note.

The benchmark Sensex index gained 31.79 per cent in 2017, extending gains into this year. The index has risen nearly 6 per cent so far in the year.

However, Julius Baer feels that there is some froth in small and mid-cap space in India.

“Gold and real estate have performed poorly and bank deposits are low, so there is a perception among households to try alternatives. There has been so much advertising on mutual funds. This continuous stream of money into domestic mutual funds and it is ironic that fund managers are value-based buyers and they don’t like such a lot of money coming, so they are reluctant buyers. They are allowed to keep a certain amount of cash due to standards, so markets keep grinding higher,” Matthews said.

Matthews is not sure whether this situation in the mid-cap space would result in any correction going forward.