Sustainability of ongoing rally doubtful, recovery next year: HSBC survey

Emerging markets (EMs) have rallied sharply over the past one month with the MSCI EM index gaining as much as 15 per cent since May 18. However, doubts are beginning to creep in over the sustainability of the ongoing bull run. According to HSBC’s inaugural Emerging Markets Sentiment Survey for June 2020 quarter, about three quarters of the 213 investors surveyed are neutral to bearish on EM prospects over the next three months despite a substantial rally until recently. More investors expect the world economy to recover from the Covid-19 shock in 2021, rather than second half of 2020.

“EMs have recouped a good part of post Covid-19 losses over the past month or so, thanks to aggressive monetary policy easing and expectations of a swift recovery in global economic activity. However, investors are generally neutral to bearish on EM prospects over the next three months,” HSBC said in a report. A little less than a fourth of those who responded had a bullish bias.

Also, those surveyed were sitting on a sizeable amount of cash waiting to be invested.

Over a half of those surveyed said they were holding more than 5 per cent of their AUM in cash. Also, 51 per cent of the respondents do not plan to change the level of their cash holdings in the near term.

“Although this points to the general level of risk aversion, it also suggests that fund managers have a sizeable amount of cash to invest once they are more confident,” HSBC said.

The respondents’ bleak market outlook stems from weaker expecations of economic growth.

Of the respondents, 47 per cent said they saw EM economic activity weakening further in the next 12 months, while the share of those that expect a pick-up stood at 37 per cent.

However, nearly two-thirds said that Asia would see the swiftest recovery led by growth in mainland China, South Korea and Taiwan. Investors also remained most bullish on equity markets of these three countries. On the other hand, respondents had the most negative outlook on equity markets in Brazil, followed by Turkey and India.

HSBC conducted the survey between May 12 and June 2 among 213 investors from 198 institutions representing more than $600 billion of assets under management in EMs.