Emerging markets ready to capitulate

Capitulation in emerging markets is getting close, a survey of fund managers with $653 billion assets under management suggests.

The survey, carried out between January 10 and 16 by Bank of America Merrill Lynch showed – perhaps unsurprisingly – that investors were at or close to record underweight positions in Thailand, Indonesia, Turkey, South Africa, Brazil, Chile and Colombia.

These emerging markets have been plagued by capital outflows since the Federal Reserve mentioned in May last year that it would be slowing down the pace at which it prints money.

But expectations for growth in emerging markets are rising rapidly in the survey, indicating a strong buying opportunity.

“Rarely have such bullish growth expectations been mixed with such bleak EM weightings,” Bank of America Merrill Lynch analysts said in a report highlighting the results of their survey.

A previous one, carried out by Societe Generale, showed that investors were bullish on emerging markets once more.

However, there was a sharp drop in optimism regarding economic growth in China, with a net 28% of the participants expecting a weaker Chinese economy.

This is also reflected into investors’ perception of risks. They see a hard landing in China bringing about a collapse in commodities as the biggest tail risk for the markets and the number of those who fear this increased in January from December.

The risk of a geopolitical crisis ranks second but the number of investors mentioning it as their main fear increased this month from last.

What decreased was the fear of an EU sovereign or banking crisis: investors still see this as the third-highest risk, but the number of those considering it “the biggest” tail risk has decreased.

Failure of Abenomics – Japanese Prime Minister Shinzo Abe’s policy to restart growth in Japan – is the fourth-ranked risk but the number of those fearing it has increased.

Intriguingly, the number of investors seeing inflation as the biggest tail risk has also risen in January compared with December, despite recent discussion of the danger of deflation.

In emerging markets, Russia has been the most loved by investors for the last eight months; a net 64% of investors were overweight the country in January.

A net 15% of investors were underweight emerging market equities.

But overall (in global markets), a net 55% of investors were overweight equities in January, from 54% in December.

Allocation to bonds was 62% underweight, slightly better than 64% underweight.

A net 24% of investors are underweight commodities, much better than a net 31% in December.

For the fifth month in a row, the eurozone was equity investors’ favourite region.


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