The U.S. financial market is married to whatever trades on the NYSE and Nasdaq. What’s with the rest of this big bad world?
There are known knowns, known unknowns and unknown unknowns. That’s what the infamous Secretary of Defense Donald Rumsfeld in the early 2000s and now American investors in global markets are basically saying the same thing about emerging markets.
A sentiment survey by Emerging Global Advisors in New York, released Tuesday, shows that money managers are still neutral when it comes to the developing countries that still drive world GDP. Here’s what EGA knows: 37% of respondents currently have 5-10% of their investments allocated outside of the core economies. Pretty much the same amount of them, 36%, have between 1-5% in emerging markets.
Most fund managers aren’t piling in either, which means many fund managers apparently lost out on the 18% gains in the MSCI Emerging Markets Index over the last three months. Some 48% say their current allocation is about the same as it was 12 months ago, with another 37% saying it is lower. Only a third in the survey said they were bullish. “Positive” was the word EGA used.
A little over half said they intend to stay the course with their emerging market equity picks for the next 12 months, but a decent 44% said they will be upping the ante this year. And that number alone is 33% higher than it was when EGA did its fourth quarter 2015 survey.
By a landslide, everyone’s favorite market is India.
China is slowing, Brazil is still in the mix of one nasty political and economic crisis and Russia will face another year of sub-zero growth, contrary to what many fund managers believed heading into the year.
One of the big takeaways from the EGA survey is that the unknown unknowns are scaring the bejeezeus out of most risk takers. For years now the U.S. has been the only game in town. In second and third place have been the QE economies in Europe and Japan. So it is not surprising that there isn’t a whole lot of conviction in the market for non-core equities. Just 50% said they’re current investment strategy reflects the region and themes in emerging markets.
Unstated in the survey, but clear from fund managers interviewed here is that oil has been the biggest macro driver of emerging markets. When oil began rising in February, all emerging markets followed. But no one knows where oil is going. If oil goes higher, emerging markets will trend higher as well, at least in the short term until investors get picky again. For instance, India is not a country that does well with high oil prices. Yet, 67% of EGA’s respondents said it was their top pick.
The United States has maintained an outsized influence on emerging markets through a strong dollar and the fact that it’s been growing at over 2% for the last couple of years while Europe and Japan have been closer to zero growth. For some emerging market managers, the real concern is how long the U.S. can continue on this trajectory without a pause.
“I am very skeptical about the economic underpinnings of the U.S. recovery,” says Rob Marshall-Lee, a fund manager with Newton Investment Manager in the U.K.
The U.S. has been stimulated by low interest rates that “give the illusion of a recovery,” he says.
Investors have been more interested in corporate growth rates, particularly in biotech and social media, with Facebook, Google and Apple being the only companies anyone seems to talk about on CNBC. Recently, on the same network, Squawk Box host and Mad Money creator Jim Cramer said corporate profits have been coming at the expense of layoffs and wage growth.
U.S.-centric investors have also been willing to disregard valuations kept afloat by stock buybacks and continued yield-hungry allocation into real estate.
“None of these are signs of a truly successful economy,” Marshall-Lee said during an investment webinar last week. He thinks the dollar will weaken, which is good for some emerging markets, but sets up oil importers for a potential fall.
Global trade has been hurt by economic weakness in Japan, the European Union and, maybe soon, the U.S.
The global economic system is highly interdependent, with economic shocks in any one of these regions rippling across riskier emerging markets. Marshall-Lee said he was concerned about the U.S. stock market in particular. “More shocks may come out of the U.S.,” he warned.
That’s doubtful to be a good sign for emerging markets.
This article was written by Kenneth Rapoza from Forbes and was legally licensed through the NewsCred publisher network.
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