After a surprisingly good run in emerging markets that sent equities to a fifth monthly gain, some bulls are easing up.
Credit Suisse Group AG forecasts developing-nation equities will underperform in the short term, while Deutsche Bank Wealth Management said it’s not as positive on emerging-market bonds as a year ago. Goldman Sachs Group Inc. said strong returns have partially eroded a previously compelling valuation signal, and BNP Paribas SA said the best gains in markets such as India and Indonesia may already be behind us.
“Much of this rally is based on improving fundamentals, which we have stressed on a lot,” Credit Suisse investment strategist Philipp Lisibach wrote in a May 26 report. “In the short run, however, the market looks somewhat stretched at this point. Fundamentals continue to be healthy, but we have the impression that the story needs a well-deserved pause.”
Emerging-market assets have won over investors amid improving prospects for growth and their resilience to U.S President Donald Trump’s protectionist rhetoric and geopolitical risk. The MSCI Emerging Markets Index rose 2.8 percent in May, taking its rally to 17 percent for 2017, compared with the 9.2 percent advance the MSCI World Index has posted this year.
Meanwhile, a measure tracking developing-nation currencies is at the highest since late 2014, shrugging off the possibility of an acceleration in Federal Reserve rate hikes leading to outflows.
Stocks in developing nations just aren’t as cheap as they were a year ago, while earnings growth has slowed at a high level, Credit Suisse’s Lisibach said. He has added emerging markets equities to his least preferred regions, though still “strongly believes” they should be part of a well-diversified portfolio, with a preference for Eastern Europe, the Middle East and Africa.
Here’s a look at what other analysts and strategists are seeing:
Capital Economics
While emerging economies are forecast to post 4.6 percent growth in 2017, the fastest since 2013, analysts at Capital Economics see signs that the advance may have started to slow in April and will level out at around 4 percent this year.
“We had anticipated that Q1 would mark the high point of the EM recovery,” Neil Shearing, chief emerging markets economist at Capital Economics, said in a May 31 report.