Hedge funds have turned bearish on emerging markets on a medium-term outlook, a recent survey of investors showed.
The survey was carried out in March by Societe Generale and involved 89 big clients of the investment bank in Asia, Europe and the US. There were 44 hedge funds in the sample and 45 real money investors, such as pension funds.
It found a major divergence between the answers of the two categories regarding the outlook for emerging markets over the next three months.
In the hedge funds universe, 56.8% of investors are bearish for the three-month outlook, with only 38.6% bullish.
By contrast, in the real money investors’ universe, 66.7% are bullish on emerging markets on a three-month timeframe, with just 24.4% bearish.
This divergence produces an overall bullish outlook for the asset class: 52.8% of the sample of investors are bullish, versus 40.4% bearish on the three-month outlook.
Hedge funds were still bullish over the two-week horizon, with 56.8% responses versus just 20.5% bearish, while in the real money world the bulls were stronger: 64.4% were bullish and just 17.8% outright bearish on emerging markets over two weeks.
The most likely explanation for this divergence could be the fact that hedge funds are watching moves by the Federal Reserve closer, and the market had been expecting the central bank to start raising interest rates in June after dropping the word “patient” from its March statement.
The Societe Generale survey was carried out before last Friday’s disappointing nonfarm payrolls data in the US, which showed job growth below 200,000 – at just 126,000 – in March for the first time in a year, and revised down the growth in jobs recorded in the previous two months.
The weaker jobs figure has already made many analysts in the US push back their expectations for a rate rise to September or say there will be no rate rise at all.
In Europe, some analysts still expect the Fed to raise interest rates in June, arguing that one months’ data is not conclusive, especially after the very strong run for US employment over the past year.
Emerging markets hard currency debt remains investors’ favourite asset class.
Interestingly, emerging markets equities advanced in investors’ preferences, replacing local currency debt as the second most liked asset class. This was helped by a big push by real money.
Local currency debt came third in investors’ preferences, while emerging markets currencies were shunned by both real money and hedge funds.
A caveat emerges from the technical picture, which measures how investors are actually positioned versus their sentiment.
The technical position has weakened compared to February, and this mainly reflects the negative impact of real money investors, the survey’s result show.
A big percentage of real money investors, 40%, currently feel over-invested, while 36% feel under-invested. This is “bad news” for the technical position of the market, Societe Generale’s analyst Benoit Anne warned.
“The last time we observed such a phenomenon was in October 2014 when investors went into panic mode,” he said.