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Conditional love - HSBC Emerging Markets Sentiment Survey

Dr. Murat Ulgen, Global Head of Emerging Markets Research

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  • Article
  • HSBC’s 17th EM Sentiment Survey find that investors are still feeling bullish…
  • …although their risk appetite is down slightly, while cash holdings are up
  • We explore their preferences, strategies, and views of risks and opportunities

It all ended up well in the end

Investors are still feeling bullish even as their risk appetite moderates, according to HSBC’s 17th Emerging Markets (EM) Sentiment Survey.

Survey respondents appear to have trimmed their positive sentiment, with the number who feel “bullish” about EM prospects over the next three months falling slightly to 38% from 40% in the previous June survey, while the proportion who feel “bearish” has risen to 13% from 7%.

This means the “net score” – net of bullish versus bearish sentiment – is a solid 25%. While this is down from 33% in June, it still suggests survey respondents have a constructive view on EM.

Investors seem to have added to their cash positions, with cash holdings now at 5.3% of assets under management on a weighted-average basis, up from 5.0% in the first half of the year. Meanwhile, our EM “risk appetite” score, measured on a gauge where “0” is “no risk” and “10” is “highest risk in EM”, has moderated marginally to 6.1 from 6.2 in June.

Slightly higher cash levels and net bullish sentiment alongside broadly robust risk appetite all tell us that investors are looking for opportunities in EM, though they are probably still waiting for the right moment, given the uncertainties that still linger in the investment environment.

Our survey was conducted between 7 August and 19 September among 121 investors from 119 institutions representing USD430bn of EM assets under management. The fieldwork began shortly after a bout of turbulence in financial markets, while its latter stage coincided with preparations for the US Federal Reserve’s first interest rate cut in many years.

In terms of risks, 35% of respondents now see “recession in major economies” as the biggest risk to the EM outlook, up sharply from 11% in the June survey. In contrast, “rate cuts by major central banks” is once again seen as the biggest potential upside risk to the EM outlook.

Meanwhile, the survey showed a sharp deterioration in investor sentiment about the EM growth outlook. Net sentiment on EM growth, net of those expecting acceleration versus deceleration, plummeted to 10%, down from 56% in June. On the flip side, though, investors now clearly expect faster disinflation across EM, as well as an acceleration of rate cuts by EM central banks.

So what does this mean for investor strategies?

Asia has reclaimed its place as the most preferred region across all asset classes, especially on foreign currency. The August turbulence, dimmer growth expectations and global monetary easing appear to benefit Asia’s lower-yielder universe.

Investor sentiment on EM FX has improved sharply, but, again, predominantly for Asia. On EM fixed income, a synchronous global easing cycle appears to have tilted preferences significantly towards local currency debt (LCD) at the expense of external debt (EXD). Investors now seem to be less bullish on EM equities and also less convinced they will outperform their DM counterparts. India, Brazil and Indonesia are the most preferred equity markets.

Finally, we asked respondents for views on Environmental, Social and Governance (ESG) investing. The results reflect a slightly lower willingness among investors to be vocal about their various ESG practices. This is consistent with other commentary as investors navigate different market environments in the US and elsewhere.

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