(March 25, 2014) — French bank Societe General has suggested investors turn their attention to—and reweight their portfolios with—emerging market securities.
The French bank’s multi-asset team published a paper this week saying that although emerging market assets had been hit sharply since May 2013, when the US Fed announced its tapering programme, they believed a lot of bad news had already been priced in.
“Therefore, we recommend rebuilding some exposure,” its note said. “In equities, Asian stock markets should benefit most from accelerating US growth.”
More generally, the bank said since the severe de-rating from 2011, emerging market equities appeared “more attractive” at about 30% discount valuation.
“In an environment of lower economic growth driven by China and more stable emerging market currencies, we recommend some exposure to emerging market bonds. We find that the current carry on emerging market bonds provides a buffer to rising US yields.”
The team said it preferred Brazil, Russia, India, and China (BRIC) and was taking short positions on non-BRIC nations. Despite recent poor data from China, the bank said it was confident the new ruling powers in the country were aware that they could not let the economy deteriorate at such a pace.
“Emerging market currencies have been hit hard and are now close to their low of 2009. At such levels, the risk of further slippage appears quite limited, especially as there has been strong policy reaction to market stress,” the Societe General note said.
In February, some 28% of investors responding to a survey by data specialist Pension Mandate said they expected emerging markets to outperform all other asset classes in 2014. Almost a quarter of those surveyed also found promise in frontier markets.
Research from London Business School last month said investors often got caught up in the “noise” about emerging markets and should try to concentrate on the underlying data as scaremongering about the asset class had been “overdone”.
“Emerging markets historically have not outperformed but investors can now expect good performance—but not to shoot the lights out,” said Paul Marsh, professor at the university. “Investors should consider the risk/reward characteristics of the asset class and not “get fixated on recent events”.
Related content: The Truth about Emerging Market Equity Performance & Are Asset Owners Ignoring Emerging Market Concerns?