Emerging markets have suffered their worst year in around a decade, but wealth managers are hopeful that a comeback is imminent.
The majority of respondents to Wealth Manager’s quarterly asset allocation survey were positive about the sector’s prospects, with Asia identified as likely to take the lead in a recovery.
UBS Wealth Management client management specialist Oliver Britton sees better prospects starting from next year, while ‘China will continue to generate strong returns’.
‘We think there are good buying opportunities for a long term hold with EMs,’ said Andrew Edwards, client services manager at The Pension Drawdown Company. ‘We expect India to bounce back, Asia is also favourable.’
However, Brendan Company, an investment manager at JM Finn, said he is still waiting for the US dollar to weaken before getting stuck in.
Overall, 29.8% of respondents expect to be overweight emerging markets equities in the next 12 months, while 48.9% anticipate a neutral allocation and 21.3% predict they’ll be underweight.
Despite a marginal decrease in negative sentiment, this represents a shift towards caution from last quarter’s survey, which found that 44.4% of respondents had an overweight and 33.3% a neutral outlook.
The trend is replicated in reader views on emerging market debt, with those expecting to be neutrally allocated nearly doubling from last quarter to 40.4%, while the proportion of both bulls and bears declined significantly.
However, there was a modest increase from 11.1% to 15.2% in those looking to take an overweight position in emerging market local currency debt, while the proportion of those expecting to hold an underweight in the asset class declined 28% to 47.8%.
This all suggests that while reader sentiment on the developing world is generally resilient, wealth managers are waiting for the picture to clear before putting their money where their mouth is.
Glum on global growth
Despite the cautious optimism on emerging markets, the survey found hopes for global growth were at their lowest since September 2016.
Almost a quarter – 22.6% – of respondents predict growth to fall in the next year, with 27% expecting a fall in corporate profits over the same period. Those figures are both slightly more than double what they were last time our readers were asked to weigh in.
Risk consultant and former Barclays Wealth chief risk officer Philip Best identified ‘trade wars and Brexit’ as the issues most likely to upset the global economy.
But for Catalyst senior consultant and former Barclays Wealth portfolio manager Joseph Marti it is ‘herd behaviour creating self-fulfilling prophecies’.
In terms of what is bothering clients, several investment managers, including Company and Tilney’s Fred Jones, cited Brexit as a major worry.
This heightened sensitivity to geopolitical risks could be behind a sudden rise in readers expecting to go overweight developed sovereign debt to 14.6%, the highest level in two years.
The 35.4% going underweight the asset class are nearly half last quarter’s figure, with those looking to hold a neutral allocation doubling to 50%.
‘Other investors’ preoccupations, currently to the downside, make a relatively conservative allocation prudent, with a few exceptions,’ said Marti.
The move towards developed sovereign debt chimes with the views of respondents on what the most important investment call will be for wealth managers in the next year.
For Jones, they should be looking at their ‘weighting to fixed income and how they are exposed’.
Marti said the main question was ‘whether or not to pay for hedging’.
‘Demand will increase for it and before long, it’ll be too expensive,’ he added.
Over 43% of those who took the survey predict investor sentiment will worsen, while 35% think it will change little and only 14% expect it to improve – a notable decline on the 34.5% who expected views to pick up
The hunt for returns
When it came to potential upsides, as well emerging market equities, commodities, such as gold, were given special mention.
The proportion of respondents expecting to have an overweight in gold increased by 24% to around 18.8% from last quarter, while those with a neutral outlook rose to 50% from 46.4%.
Interest in a property overweight also went up by around to 17% from 10.7%, with those disfavouring the asset class decreasing by a third to 25.5%.
Just over 39% are looking to hold an overweight in alternatives, an increase of 27%, while those expecting to go underweight dropped from 38.5% to 13% – the lowest level since our survey began in 2011.
These moves could be linked to a stark increase in the proportion of readers who forecast inflation to rise. The figure has risen from 6.9% four months ago to 58.49%, with 32% expecting inflation to change little and only 3.7% predicting a drop.
The latest consumer price index put inflation at 2.4% for August, after Bank of England policymakers unanimously decided to hike interest rates to 0.75% the same month, seeking to bring inflation down to the target of 2%.