Following the volatility of the foreign exchange market in Turkey and Argentina, the uncertainty about future elections in Brazil, and trade tensions in China, which were motivated by the escalation of US protectionist measures, many investors have decided to limit their exposure to emerging markets. Is it time to exit emerging markets?
According to management companies, keeping emerging market assets in the portfolios remains a good option in order to diversify risks and to capture some more profitability with some types of assets, but they also emphasize that it must be done with caution after thoroughly analyzing both the countries and the assets.
For example, Luca Paoilini, Chief Strategist at Pictet AM, admits that they continue to overweight emerging markets. "In this state of affairs we maintain a neutral position in stocks and bonds. The world economy remains resilient, but caution is justified and it is too early to overweight. However, we continue to overweight emerging stocks, as the risks are compensated with attractive valuations and solid fundamental," he says.
At Julius Baer they don’t rule out that in the short term there may be more sales in local debt from emerging markets, driven especially by the decisions that the Fed may take this week on interest rates. They are optimistic however, "Looking beyond the next Fed meeting, we note that fundamentals continue to support both local and strong currency emerging market debt on an equal basis. Valuations have returned from high risk levels to quite normal. Most importantly, global growth remains well supported by US consumer activity and housing resilience in China. Therefore, global growth is unlikely to decline to levels historically linked to emerging market bond crises," explains Markus Allenspach, Head of Fixed Income Analysis at Julius Baer, and Eirini Tsekeridou, Fixed Income Analyst at Julius. Baer.
According to Legg Mason, despite asset management companies’ valuations, investors are beginning to show their fear of exposing themselves to the emerging universe. "Real yield spreads between emerging and developed markets are at 10-year highs, reflecting the backdrop of fear that continues to spread across the developing world, when one country after another is sold and then repurchased with yields high enough to tempt value and produce hungry investors," say Legg Mason's fixed income experts.