According to the BofA Merrill Lynch Fund Manager Survey for August, investors’ weak conviction towards global emerging markets (GEM) is evident from their reported net 19 percent underweight in GEM equities. This further weakening compared to last month represents the lowest level recorded in the survey in nearly two years, even though more than three-quarters of specialist fund managers view GEM equities as undervalued.
A lot has happened since 2001, but we have to go back over twelve years to find a time when survey respondents were this negative about emerging markets as shown in the chart below.
According to Chris Bailey, there is not only over pessimistic sentiment but also relative value in emerging markets:
- BRIC 4 (Brazil, Russia, India, China) – current year average P/E x10.2, yield 3.6%
- Developed 4 (S&P500 for the U.S., U.K., Germany, Japan) – current year average P/E x15.5, yield 2.6%
Please note in the chart above the strong performance of the emerging markets relative to the rest of the world in 2002-2004 following the aforementioned 2001 sentiment lows. Could it be that we’re close to a bottom?
It’s still unclear. The US is coming out of a low interest-rate environment, rates are slowly ticking up and money is finding its way back home. In 2002-2004 the Fed was showing no signs of increasing interest rates, so money had no problem flowing into Emerging Markets in search for yield and higher growth. Same in 2008-2010.
Having said that, EMs look attractive from an investment standpoint, but I’m not so sure we’ve seen the bottom yet.