Remain bearish on emerging market, says BoA ML

Lists seven reasons for not initiating 'buy trade'

Equity strategists at influential brokerage Bank of America Merrill Lynch (BoA ML) on Monday said they continue to remain bearish on emerging markets and have listed seven reasons for not initiating 'buy trade'. Low investor sentiment, earnings contraction and confusion about China's policy are some of the reasons cited by Ritesh Samadhiya and Ajay Singh Kapur, equity strategists at BoA ML.

The analysts duo said EMs are "exceptionally fragile" as they haven't rallied credibly from recent low sentiment levels. Even a weakness in the US dollar has failed to spur a rally in Asia and EMs, they add.

"The behavior of US, European and Japanese bank stocks and the yield curves in these markets suggest the markets are wary of negative interest rate policy (NIRP) and are questioning the incremental efficacy of monetary policy on generating nominal growth," says BoA ML in a note tiled 'Stay bearish and defensive.'

Strategist at BoA ML believe there is still scope for the correction as the market are not yet attractive on an EV/Ebitda (enterprise value to earnings before interest, tax, depreciation and amortisation) basis.

"Valuations still remain nowhere close to a Buy, in our view. The EV/EBITDA for Asia ex-Japan is 8.5 times versus the 20-year average of 8.4 times. At 6.8 times, or 20 per cent lower the market might look interesting to us. For EMs, the EV/EBITDA is 7.4 times, versus the 20-year average on 7.1 times. At 6 times, or about 18 per cent lower, EMs could look interesting," said BoA ML in a note.

On the flip said, BoA ML says markets might do well on robust policy move by a developed market central bank or better Chinese data. Also, "the potential of lower interest rates in China, India and Russia could stabilize growth expectations and make risk assets like equities more attractive to retail investors," the note said.