Survey sees emerging markets back on global fundmen’s radar

Global fund mangers are increasingly looking at global emerging markets (GEM) as the risk-equity valuations appear cheap and risk appetite, though still low, seems to be stabilising.

The global fund manager survey by Bank of America Merrill Lynch in June shows that a net 31% of investors are overweight (OW) on emerging markets, up from 19% last month.

“Though the allocations are nowhere near 2009 highs (a net 54% were OW in July-09), EM equity performance has remained robust versus developed markets this year, indicating that investors see GEM as much less risky today relative to other markets,” said Michael Hartnett, Michael Penn and Jacky Tang, equity strategists at Bank of America Merrill Lynch in the survey.

The global FMS further reveals that risk appetite has started to moderate in June after sharp falls last month. “The risk indicator slipped marginally to 37 this month after falling from 46 levels to 38 last month. At the same time, with markets down 10% from recent highs, equities have started looking undervalued (-38%), lowest since March (-42%). However, the markets are not yet compelling enough,” said the survey.

There is also a reduction in negative sentiment towards the euro and European equities. The recent survey shows 19% of the global panel predict the euro will appreciate over the coming year, up from 7% in May. Similarly, the proportion of global investors underweight on eurozone equities has fallen to a net 27% from 34% a month ago.

The survey suggests that confidence in China has fallen to its lowest since January 2009. A net 27% of fund managers expect China’s economy to weaken in the coming 12 months, a big turnaround from April when a net 21% expected the economy to improve.

Among countries in Asia Pacific (ex Japan), the regional investors are most bullish on Indonesia and China, followed by South Korea and India, while Australia is the least favoured.

Domestically, FIIs, that had sold Indian equities worth Rs 9,341 crore in May, have resumed inflows, though the figure is still low at Rs 2,051.80 crore in June till date. The markets have recovered 8.68% from their recent lows on May 25, 2010, with Sensex moving up 1390 points since then.

“People are still skeptical. However, the earnings growth in emerging markets is expected to remain strong and we would see strong inflows resuming soon,” said Sandip Sabharwal, CEO - portfolio management services at Prabhudas Lilladher.

Market participants see Indian equities rangebound in short term, with a positive bias. “The markets, which were having an overhang awaiting the monsoons, would see a rally in line with the boom in the economy as the rains set in,” said Ramesh S Damani, member, BSE.

“Our bias is towards stronger flows keeping in mind the outflows during the previous month. Investors may try to get back in as the situation in their home economies becomes better. The sentiment overall is uncertain and we may see markets trading in a narrow range over the next two months,” said Ajay Argal, co-head of equity investments at Birla Sunlife AMC.