There are bargains everywhere in emerging markets, but few investors brave enough to grab them.
PineBridge Investments says would-be buyers should bunker down for a time, while AMP Capital Investors Ltd. says the price action suggests the selloff has further to go. Aberdeen Standard Investments is worried that markets are failing to take heart from the flat-lining dollar.
The dearth of buyers underlines how some investors may have lost their nerve as a rout recently centered on Argentina and Turkey began spilling into even the most robust of emerging markets, fueling concern of broader trouble. The assets of developing economies have also become trickier to navigate amid outsized swings: the gap between a JPMorgan Chase & Co. gauge of expected volatility in developing-nation currencies and a Group-of-Seven measure was at the highest level since 2009.
“Market sentiment has deteriorated fast and it seems appropriate to bunker down for a little while and not be a hero,” said Anders Faergemann, a fund manager at PineBridge in London, which oversees $87 billion. “We have become slightly more cautious for the short term and will bide our time before building larger holdings in our favorite currencies.”
Emerging markets appear to have taken on a life of their own. Developing-nation currencies retreated 2 percent last month, set against the dollar’s 0.7 percent gain. Pledges from Turkey and Argentina to shore up their currencies failed to stem the declines, and an index of stocks headed toward a bear market.
It’s not so much the additional selling, but the lack of buying that spells more gloom, said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard.
Gun Shy
“There are loads of bargains out there, but everyone is gun shy due to the lack of near-term catalyst for a rally,” Gutierrez said. “My biggest concern is that the dollar rally has stalled out yet that hasn’t given us traction in EM FX, like we all thought would happen.”
Concerns that troubles in emerging markets could spread have also held back investors.
Markets bear “the hallmarks of a vicious circle which can intensify further” and U.S. equities won’t be immune to the contagion, according to Nader Naeimi, AMP Capital’s head of dynamic markets. Only a pause in U.S. interest-rate increases or signs that China’s easing measures are supporting growth could stop the “hemorrhaging,” he said.
“With emerging-equity valuations not so demanding and currencies already cheap, a U.S.-led leg lower in emerging-market assets over the next several weeks should set the springboard for tremendous buying opportunities across the emerging world,” Naeimi said. “The golden opportunity will come, but you need to have dry powder to take advantage of it.”