Sentiment turning positive towards emerging markets
Improving investor sentiment, lack of supply and favourable technical factors are creating selective opportunities in emerging market debt and equity according to Luca Paolini, Chief Strategist at Pictet Asset Management.
Sentiment towards emerging markets seems to be turning as tentative signs of stabilisation in economic activity have emerged in Asia while liquidity conditions have improved following easing measures by the Chinese central bank.
The discount at which emerging market stocks trade to their developed counterparts seems excessive and we are already seeing investors rebuild their holdings in the asset class.
However, we will need to see further evidence of an economic stabilisation in China to trigger an upgrade to a full overweight.
In terms of emerging debt, we have started to add some exposure to emerging market corporate bonds, such as some Latin American blue chip issuers, which have up to now underperformed significantly and are due a rebound. We are now overweight in emerging credit.
The shrinking supply of EM corporate debt is also a supporting factor. There is also some value to be found in emerging market US dollar debt as the ability of governments to service their debts is not in question given healthy reserves and low debt-to-GDP ratios.