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- Emerging markets
Tempered enthusiasm
- Investors have turned less bullish on emerging markets in our latest survey…
- …but are still not outright bearish going into 2025
- The Middle East is a preferred region for the first time in our survey’s history
HSBC Emerging Markets Sentiment Survey
Investors have turned a little more cautious on emerging markets (EM) but continue to see select opportunities as we head into 2025, according to HSBC’s 18th EM Sentiment Survey.
The number of investors who are ‘bearish’ on EM prospects over the next three months nearly doubled to 23% from 13% in the September survey, with those who are ‘bullish’ retreating slightly to 36% from 38%. Net sentiment (net of bullish versus bearish views) fell to 13%, down from 25% in September – but nonetheless remained positive.
Investors’ ‘risk appetite’ score also moderated marginally to 6.1 from 6.2 on a weighted average basis, measured using our gauge where ‘0’ is ‘no risk’ and ‘10’ is ‘highest risk’ in EM. Their cash levels dropped substantially to just 4.4% of assets under management from 5.3% before.
The survey was conducted between 22 October and 4 December among 101 investors from 101 institutions representing USD343bn of EM assets under management. The fieldwork coincided mostly with the post-US election backdrop, marked by volatility, elevated US rates and a stronger US dollar. The polling period also saw announcements on policy measures designed to stabilise the outlook in the Chinese economy, which has substantial implications for EM through various channels.
Investors’ main worries in terms of the downside risks to the EM outlook have shifted, with the risk of Federal Reserve/developed market (DM) rates staying higher for longer being elevated to the top, compared with recession fears in September. This is also reflected in our new question about US/DM inflation, where 42% expect it to be higher versus only 27% expecting it to be lower over the next 12 months. While rate cuts by major central banks is still seen to be the biggest upside risk to the EM outlook, there was a noteworthy sharp rise in easing of geopolitical tensions.
Investors’ growth expectations for EM continued to moderate, while inflation is also seen as likely to decelerate, although with a lower conviction. Asia leads with better growth expectations, which understandably reflects China’s stimulus measures.
What does this backdrop mean for investor strategy?
Investors overwhelmingly focused on the Middle East, both in terms of current net positioning as well as their forward-looking expectations, for the first time in our survey’s history. This is followed by Asia as another preferred region. More favourable expectations on the geopolitical front as well as China’s economic stimulus appear to be driving these preferences.
EM FX sentiment deteriorated significantly with the net sentiment (net of appreciation versus deprecation) falling to one of the lowest levels in the survey’s history, in line with a resurgent US dollar. Local currency debt remained the favourite asset class in EM fixed income – given expectations of more rate cuts – though it is favoured by fewer investors. EM equities outlook also dampened both in absolute and in relative terms versus DM equities.
On the Environmental, Social and Governance (ESG) front, the share of investors running an ESG portfolio directly and partly/indirectly was almost unchanged at 32% compared to the previous survey.
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