Getting more conviction on Emerging markets

We are becoming more constructive on Emerging markets, as earnings growth is expected to stabilize and recover from this year on. Compared to developed markets, economic newsflow has improved since the turn of the year. Looking forward, we expect this to materialize in equity performances. Emerging markets have been hit by the recession in commodity-exporting countries and the uncertainty of the Chinese FX policy, leading to multi-year equity market underperformance vs. the MSCI World. After underperforming for several quarters, emerging markets taken as a whole are showing some stabilization.

In spite of decade-low valuations, this is a contrarian call as recent fund manager surveys continue to point to the sharp underweight positioning of emerging markets. The uncertainty surrounding the US slowdown has lowered upward pressure on the US dollar, easing downward pressure on EM currencies, and especially the Yuan (fewer outflows). The Chinese central bank also intervened to calm speculation on devaluation.

Emerging markets are looking more robust, with current accounts improving since May 2013 and less exposure to commodity sectors. Against this backdrop, recent spread widening can be mainly attributed to a flight to quality in US Treasuries rather than a significant rise in emerging bond yields. As a result, we are still comfortable with our stance on emerging market debt.