Lloyds Bank

Investor confidence in emerging markets may be turning

14 May 2014

  • Sentiment towards emerging markets shares rises after the falls in the first quarter
  • Investors less confident in US stocks, possibly due to a combination of weather-related slowdown and concerns over possible overvaluation
  • Investor sentiment in UK property slows after large leaps

Confidence in emerging market shares this month has seen a sharp rise according to the Lloyds Bank Private Banking Investor Sentiment Index, with a swing of four percentage points – the highest for the month amongst all asset classes covered.

According to the monthly survey, the net sentiment1 among investors in emerging market shares rose four points from 15 per cent to 19 percent, turning around a drop of three percentage points the previous month.

Commenting on the latest Investor Sentiment Index, Ashish Misra, Head of Investment Policy at Lloyds Bank Private Banking, said: “We have been seeing early signs of a recovery in investor appetite towards emerging market shares, with anecdotal evidence on investor fund-flows into emerging market-dedicated exchange-traded funds suggesting as much. Indeed, our own client portfolios reflect this and are close to a neutral allocation relative to benchmark.”

It has been a challenging couple of quarters for emerging markets since investors began pricing in the likely impact of the US Federal Reserve’s QE taper policy on the asset class. However, the confluence of several recent factors may have reversed that trend.

Ashish Misra continued: “We have recently seen that emerging markets appear to have weathered the volatility in their currency and bond markets arising from the tapering of the Federal Reserve’s asset purchase programme better than investors feared. Secondly, the counter-intuitive and persistent weakness of the US Dollar, which was unexpected in the context of this tapering, has allayed fears of a mass unwind of dollar-funded trade in emerging markets.

“Finally, the very volatility that the initial days of taper brought to emerging markets has opened an attractive valuation gap between emerging and developed markets.”

The sentiment rise was juxtaposed to a fall in investor confidence towards US shares, with weather-related moderation in economic activity adding to concerns that valuations may have gone too far possibly playing a part. Sentiment towards US shares fell four points, from 16 percent to 12 percent.

Ashish Misra concluded: “The fall in sentiment for US equities was probably a reflection of the correction in that asset class. This is likely down to investors fretting about the impact of weather on corporate earnings growth and unseasonably cold weather during the first quarter weighing on macroeconomic indicators ranging from retails sales to housing starts.

“While we saw a pick up towards the end of the quarter – in terms of both numbers and outlook – the moderating rate of corporate earnings growth for Q1 2014 would have given investors pause.”

While sentiment towards UK property is still by far the highest in the index (60 percent) its fast rise has slowed in recent months, with only a one point rise since March. However, the asset class has still seen positive sentiment more than treble in the past year.

UK shares, Japanese shares and UK Government bonds all saw two percentage point increases, while sentiment towards Eurozone shares went the other way, dropping by two points. With emerging market and UK shares recording sentiment gains, UK corporate bonds, gold and commodities were all relative flat. The movement in sentiment away from perceived safe haven asset classes and towards shares continues to show self-directed and sophisticated investors.

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