Mixed Views On Emerging Markets: Funds To Buy & Sell

There are mixed views on emerging markets now. According to a report from Bank of America Merrill Lynch, fund managers have mostly been pessimistic about emerging-market equities since 2001. On the other hand, some strategists at leading banks and financial companies believe that securities from emerging markets may have hit their lowest point.

Amid the contradictory opinions, certain market experts are of the view that investors often invest in emerging market funds too late or they stay invested for too long. So, while buying certain favourably ranked emerging market funds at a discount now should be a prudent move, investors may also dump certain Sell-rated funds that their portfolio will not miss.

The Pessimism

According to Bank of America Merrill Lynch’s monthly survey, fund managers are the most underweight on emerging-market equities against developed-market equities since the survey began in 2001. While post 2009, fund managers’ relative positioning had jumped and stayed mostly in the green till 2013, the sentiment soured after that. In 2014, the sentiment dropped to a new low before rebounding in late 2014 and early 2015. However, the sentiment is the most pessimistic now.

The bearish outlook is concentrated mostly on Asia. Investors are apprehensive about the slowdown in China’s economy while the U.S. central bank may hike rates. The International Monetary Fund (IMF) meeting on Nov 30 is also crucial. Investors fear further devaluation in the Chinese currency but not before IMF adds the yuan to its Special Drawing Rights basket of currencies. And if this happens, Bank of America strategists fear that the markets will move even lower.

Goldman Sachs projects that yuan traded at offshore rate may weaken by 2.5% to 3% against the dollar in the next 2 months. Eventually, the devaluation of yuan may impact other emerging-market currencies, as they are often influenced by the monetary policies in the world’s second-largest economy, China.

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