Asset allocators have hailed a buying opportunity in emerging market equities after the sector was hit by a massive sell-off last week.
Emerging market indices suffered sharp drops as investor concerns rose over fears the US Federal Reserve chairman, Ben Bernanke, will begin tapering its quantitative easing programme.
The easy monetary policy has been a boon for emerging markets, but fears of its withdrawal led to sharp drops in the sector.
But asset allocators have said the market falls present a huge buying opportunity, as emerging markets now look excessively cheap, and worries about the end of quantitative easing in the US have been overplayed.
Tom Becket, chief investment officer at Psigma Investment Management, said he is looking to increase the emerging market equity weighting in his portfolios, from 7.5 per cent to 10 per cent in the balanced portfolios.
“What is happening now is the inverse of what happened in 2008, when the markets were overly optimistic on emerging markets,” he said. “They are now being overly pessimistic.”
Emerging market equities currently trade at a 25 per cent discount to their developed market peers, which Mr Becket claimed made them attractive on a relative basis, adding that “valuations are attractive from both an earnings and dividend growth perspective”.
Mr Becket said the risk-off phase sparked by fears over QE tapering was “premature”.
John Ventre, head of multi-manager at Old Mutual Global Investors, said the “logical action” would be to use the weakness in emerging markets as a buying opportunity, and confirmed he had roughly 8 per cent cash with which to play in his portfolios.
Max King, global strategist at Investec Asset Management, was also bullish on emerging markets, but warned buyers of some volatility still to come.
He said: “When these cycles turn, you often see the darkest time before the dawn, so early buyers need to be prepared for volatility in the short term.”
Ayesha Akbar, manager of the Fidelity Multi Asset Open Growth and Fidelity International funds, said she was overweight Asian emerging markets and was “very tempted to increase exposure” as, on a price-to-book valuation, some emerging market equities are nearly as cheap as they were in the middle of the Asian crisis in 1998.
The MSCI Emerging Markets index has fallen 13.3 per cent in sterling terms since its recent peak on May 22. The FTSE Emerging Markets index fell 1.7 per cent on June 11, a decline of more than 10 per cent since May 22. Brazil fell 3 per cent on the day, which caused its market to enter a technical bear market – a drop of more than 20 per cent from its most recent peak.
Research from EFPR Global found that, in the final week of May, emerging market equity funds suffered withdrawals of $1.4bn (£895m), the biggest weekly outflow since late 2011.
