Remain bearish on emerging markets: BofA-ML

Two equity strategists at Bank of America Merrill Lynch (BofA-ML) said on Monday they continued to remain bearish on emerging markets (EMs), listing seven reasons for not initiating 'buy trade'.

Low investor sentiment, earnings contraction and confusion about China's policy are some reasons given by Ritesh Samadhiya and Ajay Singh Kapur, the strategists. They say EMs are "exceptionally fragile", not having rallied credibly from recent low (investor) sentiment levels. Even weakness in the dollar has failed to spur a rally in Asia and EMs, they add.

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

They believe there is more scope for a fall in stocks, as the markets 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 six times or about 18 per cent lower, EMs could look interesting," said BofA-ML.

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