Dubai: Beaten down Emerging Markets (EM) equities and bonds may act as a safe-haven, as fund managers are turning cautious on developed markets as rates rise and heightened risk of trade wars.
The MSCI emerging markets neared the bear market territory in early September, and have shed 17 per cent of its value from its 52-week high of 1,278.53 struck in January this year. This compares with a 7 per cent rise in the Dow Jones Industrial Average.
“In principle there is a play in emerging markets. EMs have lagged developed markets and there are some attractive yields offered in good quality companies, where balance sheets have improved,” Nadi Bargouti, head of asset management at Emirates Investment Bank, told Gulf News.
The emerging markets have been sliding as a strong dollar created current account imbalances, impacting the local currencies of countries, and thereby causing a sell-off, but fund managers see that the under-performance may trigger a fresh wave of bargain buying.
“We had been moving to emerging markets selectively and we are happy with that exposure. In the US it is becoming difficult to find good yield,” Bargouti said.
The US markets has been making record highs due to a pick-up in growth amid tax cuts by the federal government, and as analysts expect earnings to remain buoyant and justify the share price.
The US markets are trading at 17 times their earnings, which are considered relatively expensive, whereas European equities traded at 15.5 times, while emerging markets, which have lagged in performance, traded 12-15 times its earnings, which according to fund managers may offer value to investors.
Small maturity bonds
State Street Global Advisors,which manages $2.8 trillion of clients money, is seeing some value in emerging market bonds, and expect asset managers to buy back emerging market bonds when they re-balance their portfolio at the end of third quarter.
“Emerging markets local currency bonds have fallen 10-10.5 per cent this year and we that sector may stabilise and recover from here. Emerging markets begin to look attractive again from currency valuation perspective,” David Furey, Senior Portfolio Strategist in the fixed income, cash and currency investment team, at State Street Global Advisors said.
“Within emerging markets we have stronger and weak countries. Emerging markets are in better shape what they were five years ago, and emerging currencies are not over-valued, but under-valued,” he added.
In the United States, the fund manager is focussing on bonds of smaller maturities of 1-3 year horizon amid threats of inflation, which may result in higher than expected increase in interest rates.
“We may get a little dangerous situation if inflation were to rise more than expected significantly, and there will be re-pricing of the back end of the curve. That would be a potential negative situation for the bond market,” Furey said.