CFA UK: Investor sentiment towards EM equities improves despite lingering concerns

Some 53% of the total 245 respondents to the survey now consider emerging markets equities to be either “very” or “somewhat” undervalued, an increase of 11 percentage points (ppt) from the previous quarter.

Meanwhile, just 10% of investors see developed market equities as “very” or “somewhat” undervalued, a decrease of 1ppt from Q2.

Will Goodhart (pictured), chief executive of the CFA UK, said the significant improvement in sentiment towards emerging markets was the result of the significant currency sell-offs in EM countries such as Turkey, South America and South Africa.

Emerging markets have had a torrid time amid trade war concerns and a strengthening US dollar, with the MSCI Emerging Markets index falling 10.8% in sterling terms this year to 31 October 2018, versus a rise of 7.4% for the SP 500 and 3.4% for the MSCI World, according to FE.

Furthermore, idiosyncratic issues in Turkey and Argentina have caused large falls in their respective currencies.

Goodhart said he expects investor perceptions to shift to a more neutral position in the coming months with rising interest rates, a strong US dollar and escalating trade tensions not boding well for the asset class.

“Perhaps most surprising is the extent to which emerging market equities are seen as undervalued,” he said.

“Not all has been positive for emerging market equities recently, though; we’ve seen raising rates, a strong dollar and US trade tensions – all of which do not bode well for them – and we may see investors’ perceptions shift to a more neutral position in the coming months. Our respondents continue to see these as uncertain times.”

In the fixed income space, bond overvaluation perceptions decreased overall, but investors see more value in government bonds than corporates.

Some 67% of respondents deemed government bonds to be overvalued this quarter, down 9ppt from Q2, while 76% view corporate bonds as overvalued, down 3ppt from the previous quarter.

Elsewhere, the survey found 32% of respondents believe gold, which was seen as better value in Q2 than ever before in the Valuations index, was either “very” or “somewhat” undervalued, a 6ppt jump from Q2 while 49% said it was now “fair value”.

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