In its (short-term) tactical asset allocation, ING Investment Management has opened an underweight in emerging market equities. "We feel that the event risk in that region is one of the most obvious candidates that could trigger a market correction and squeeze in crowded investor positions", Henk Luijten comments.
With an increasing concentration of consensus thinking on equities, peripheral assets and high yield bonds, it will become increasingly important to know when to change to a new horse during the first half of 2014. At this point it is too early to completely change course, but we have taken some moderate steps already to diversify our overall risk taking since the beginning of the year.
Joining herds and ‘ride the wave’, while looking at risks
Joining herds of other market participants that are moving in a certain direction is well-known characteristic of investor behavior. However, it is also key reason for markets to deviate from underlying fundamentals. To a large extent this is more a fact of life that needs to be acknowledged than a source of concern. It should probably be treated as a driver of investment opportunity rather than anything else. In this respect it is important to identify the biggest events that could test the current trends. Here, ING IM sees reason to look at emerging markets.
Growth momentum in emerging world is declining
Since mid-November, the economic growth momentum in the emerging world has been declining. Its proprietary growth momentum indicator, which captures the 3-month change in key economic activity indicators for the main 17 emerging economies, is clearly on a downtrend. At the same time, the average of all EM economic surprise indices also has deteriorated. For now, the fund manager sees no indications that EM growth dynamics will improve in the coming months. Financial conditions also have been weak recently. With capital flows still negative, this is unlikely to change anytime soon.
Some emerging equity markets deserve a positive view
While the emerging world as a whole is struggling to benefit from higher demand growth in the US, Europe and Japan, there is a group of countries that is still competitive and that have a larger exposure to growth in developed markets than the emerging market average. ING IM has a strong preference for the markets in this group: Korea, Taiwan, Mexico and Poland. The growth prospects in these markets are better, while the four markets also have limited macro imbalances.
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