Cash is king for whipsawed emerging-market investors, says HSBC

Emerging-market investors whipsawed by volatility are sitting on a pile of cash and are waiting for markets to stabilise before getting back into higher-yielding assets, according to an HSBC Holdings survey. About 45 per cent of investors that the London-based bank polled have more than 5 per cent of their portfolios in cash and almost two- thirds of them don’t expect to deploy it over the next three months.

Their biggest concern: the prospect that markets will overreact to any sign that the Federal Reserve is reducing its support for the US economy by tightening policy. Investors have also become less optimistic on the growth outlook for developing economies over the next 12 months and have downgraded their inflation expectations, according to the poll.

“Emerging-market investors are waiting for the right time to invest because the markets have been gyrating wildly over the past two months,” Murat Ulgen, global head of emerging-market research at HSBC in London, said in a statement.

HSBC surveyed the investors between June 8 and July 23, just before the latest government crackdown in China dealt a fresh blow to sentiment toward risk assets. Developing-nation equities are headed for their worst month since the March 2020 rout, while currencies and local bonds are set for their second month of losses in July. Investors are holding on to cash as they seek to dodge potential volatility in August, when the usual drop in liquidity tends to exaggerate market moves.

“We have been steadily de-risking and reducing our exposure to emerging-market debt since the beginning of the year, so we are not adjusting our portfolios or changing our behavior drastically here on the back of the China weakness,” Paul Greer, a money manager at Fidelity International in London, whichoversees about $700 billion. “We expect the market to remain with a soft tone into August, when seasonals and market liquidity are usually both quite poor across EM.”

About half of the respondents were neutral on the prospects for developing economies over the next three months, according to HSBC’s survey of 124 investors from 119 institutions overseeing $506 billion. 

Still, 40 per cent are now bullish, up from 34 per cent in the first quarter of the year. Risk appetite — measured on a scale of 0 to 10 — rose modestly to 6.17 from 6.04.

Front-Loading Hikes

The prospect of policy tightening by the Fed was seen as a bigger concern than inflation and the global pandemic. That’s encouraging investors to favor countries that are front-loading rate hikes such as Russia and Brazil, whose currencies have outpaced peers this year.
 

As investors bet on higher policy rates across developing economies, about 40 per cent of those surveyed expect emerging-market currencies to appreciate against the U.S. dollar, up from 22 per cent in April. They are also hungry for yields and tout Russia, Nigeria and South Africa as the top three markets with a more favourable outlook in local-currency debt.
 

“The feeling among investors is that while the growth outlook is dimmer and inflation is less of a concern than at the beginning of the year, EM countries will continue to hike rates because they are trying to pre-empt Fed tightening and avoid a repeat of the taper tantrum we saw in 2013-2014,” HSBC’s Ulgen said.