Asset managers signal a return to emerging markets

Rio de JaneioroA number of asset managers have signalled a more bullish stance on emerging market assets, suggesting a revaluing of the beaten-down asset class.

Pictet Asset Management says it is building up positions in emerging market equity and local currency debt, with Brazil and China the markets its investment team favours.

“Valuations of emerging market currencies have fallen to a point where they are now starkly at odds with such economies’ fundamentals,” says Luca Paolini, chief strategist at Pictet Asset Management.

“Emerging currencies are, on average, trading at almost two standard deviations below their equilibrium level (which takes into account a country’s net foreign asset holdings, inflation rate and its relative productivity).”

The firm says outflows from local emerging debt markets have eased in recent months, helping to justify its new overweight position in local currency bonds. However, the firm has reduced to underweight its position in dollar-denominated emerging market bonds.

Meanwhile, Ashmore, a specialist emerging market investor, declared that the “rebound” in emerging market assets was gaining momentum.

“Notwithstanding the global macro backdrop and favourable technicals in EM assets, it looks as if the market is starting to respond to incremental evidence that economic re-balancing is at play with external vulnerabilities subsiding,” says Gustavo Medeiros, portfolio manager at Ashmore.

Medeiros highlighted several trends to support the revaluation of emerging markets assets such as the Brazilian trade balance returning to surplus in March, measures announced by China's State Council to support domestic demand and a reduction in the Turkish trade deficit.

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