Fund managers across the globe are no longer keen on chasing emerging markets. According to the latest Merrill Lynch Fund Manager survey, the proportion of global fund managers increasing positions in Global Emerging Markets (GEM) showed a sharp fall. | |
| The number of fund managers increasing allocations in GEM has turned negative, from a positive 5 per cent in August 2005. However, on the balance fund managers are still overweight on GEM. |
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| Besides, the cash levels in GEM equity portfolios have jumped to highest since spring 2004. Though inflows to GEM equities have also dropped, Merrill Lynch maintains that the sentiment towards GEM is still positive. |
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| The report says that global liquidity is growing at 10 per cent year-on-year and US Federal Reserve and other central banks have not yet tightened money supply enough to cause a liquidity crunch. |
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| Again, while global growth is accelerating, relative valuations remain positive as merging markets still trade at over 30 per cent discount to the rest of the world and over 40 per cent of the indices trade below 10 times 2006 earnings estimates. |
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| "Ample liquidity, strong risk appetite and a pick-up in global growth expectations are the catalysts. New highs in GEM indices are expected. We are bullish until the Fed negatively impacts liquidity and China negatively impacts commodity prices," the report said. |
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| Merrill recommends that investors bear in mind long term while eyeing emerging market equities in a global portfolio. |
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| However, the broking firm has downgraded India to "sell" while maintaining its overweight position on Brazil, Russia, Korea and Indonesia. |
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| "Capital inflows may be abating as suggested by the weak currency; an inflection point in inflation looks imminent and India is the most expensive large market within GEM. |
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| The old-fashioned way to outperform in emerging markets is to buy the equity markets with the highest current account surpluses and the lowest forward P/E ratios. |
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| "We expect Brazil, Korea, Russia and Indonesia to enjoy current account surpluses and inexpensive stocks in 2006. We are overweight all four markets." |
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| So far this year, the GEM equities are up 17 per cent. Russia, Brazil, Korea, Mexico and Turkey have been the strongest markets in dollar terms. Energy, utilities, staples and health care have seen the largest sector gains. |
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