Asset Managers Are Warming to Emerging Markets as Banks Continue Their Rally

emerging markets china

Banks in China, among other emerging market locations, are outperforming their developed world peers.

Nearly half of asset managers plan to add more emerging markets asset to their investment allocations over the next 12 months, according to a new survey. Among those asked by Emerging Global Advisors in the second quarter of 2016, a full 46% plan to shift their portfolio towards emerging markets.

In a recent interview, Edward Kerschner, vice chairman and chief investment strategist at Emerging Global Advisors, said that emerging markets are regaining their appeal for a variety of reasons. Brexit is top of mind for many investors. But in addition to the turmoil in Europe, changing monetary policy trends throughout the world mean that the dual benefits of growth and safety previously found in developed economy assets may be disappearing.

While the U.S. Federal Reserve has shown its willingness to raise interest rates for the first time in a decade — and may do so again this week — Kerschner noted that emerging markets grew 6% faster than developed markets over the past six months. This is an improvement over last year. So with some U.S., U.K., and E.U. investments showing less potential, it seems many asset managers are now remembering the simple fact: Emerging markets are where the largest growth opportunities exist.

“The story is the growth of the world’s middle class,” Kerschner told Financial Advisor magazine. “While the middle class share in the U.S., Europe, and Japan is shrinking, it’s growing in China and India.”

emerging markets

Chart: Emerging Global Advisors, “EGA EM Investor Sentiment Survey,” second quarter 2016

The results speak for themselves. The International Monetary Fund recently maintained its 4.1% growth forecasat for emerging markets in 2016 while cutting its developed economy expectations to just 1.8%. The iShares MSCI Emerging Market exchange-traded fund is also up 12% year to date, according to Barron’s. And in a note to investors, Citigroup highlighted that the financial services sectors in many emerging market countries are outperforming their developed world peers.

Overall, Citi analysts said, the emerging market bank index is up 3% for the year. That does not constitute huge gains — but it is much better than the 13% drop among the developed market banks index so far in 2016. Bank stocks are doing particularly well this year in Thailand, Taiwan, Philippines, Peru, Brazil, and Russia. Given their price, there are many bargains to be had, say the analysts.

“In spite of the rally year to date, the emerging market banks sector largely trades below historical median valuations,” they wrote. “Chinese banks dominate the list of stocks at the largest discount vs. historical valuations.”

For many, the move back towards emerging markets has already begun. Currently, more than three-fourths of asset managers surveyed by Emerging Global Advisors either have the same or a higher allocation of their investments in emerging markets than they did at this time last year. Roughly six out of 10 of those surveyed now have an emerging market allocation of between 1%–10%, while almost one-third have an allocation of more than 10%.

Investors are indeed putting their money where their mouths are. Almost half (47%) say they have a positive view of emerging markets compared to just 10% taking a negative outlook (while 43% characterized themselves as neutral on the matter). This represents a vast change from the fourth quarter in 2015, when only a quarter (26%) of those surveyed looked  at emerging markets favorably.

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