Confidence in EMs halves in two years

Confidence in emerging market investment returns has plummeted in recent years, according to a major survey of global asset managers.

A study from Create-Research on behalf of Principal Global Investors has found that the percentage of managers positive about emerging markets has nearly halved to 20 per cent, from 38 per cent in 2012.

However, the survey also highlighted the growing differences in investor sentiment between emerging market countries, with the group increasingly being analysed separately rather than as one homogenous block.

The report surveyed more than 700 groups, including asset managers, fund distributors and sovereign wealth funds, across 30 countries with combined assets of $29.7trn (£17.5trn).

The survey, which was last conducted in 2012, asked respondents to choose one of five options for their view on the emerging market investment story, from ‘believers’ to ‘pragmatists’ and down through more negative responses in terms of ‘sceptics’, ‘cynics’ and ‘deserters’.

The believers plummeted to 20 per cent this year from 38 per cent in 2012, while the deserters doubled from 6 per cent to 12 per cent. There was also a large increase in those describing themselves as cynics or sceptics.

Nick Lyster (pictured), European chief executive of Principal Global Investors, said: “The study indicates there is no longer a blanket acceptance of the emerging market story. Investors’ return expectations have dropped markedly for equities and bonds.

“The gravitational pull in key asset classes guides investors West over the next three years.”

However, when asked about their current investment strategy towards emerging market equities and debt, the managers revealed a stark contrast to their professed sentiment.

Compared with 2012, the 2014 survey uncovered a significant increase in managers’ ‘opportunistic’ investing in both emerging market equities and bonds.

The percentage of managers investing in emerging market equities opportunistically, to take advantage of low valuations or for short-term gains, rose from 30 per cent in 2012 to 48 per cent in 2014.

The change was even more pronounced in emerging market bonds, in which 51 per cent of managers are opportunistically investing, compared with 15 per cent in 2012.

Significantly fewer managers are investing in bonds on a long-term buy-and-hold basis, however, with the percentage of managers doing so falling from 44 per cent in 2012 to 34 per cent now.

But there has been an increase in managers investing in equities for the long term, up from 43 per cent to 49 per cent.

Mr Lyster said: “Emerging market equities are looking cheaper on a relative valuation, though investors will probably need to be patient to benefit.

“Investors with a long-term perspective still need to consider a significant strategic allocation to these markets.”

In spite of the broadly deteriorating sentiment towards emerging markets, the survey highlighted that investors were increasingly moving away from a global emerging market outlook towards analysing each country on a separate basis.

Professor Amin Rajan, chief executive of Create-Research and the author of the report, said: “While emerging markets in the East continue to converge with developed markets in the West, it is clear from our research that emerging economies will no longer move in lock step.