Buy emerging market stocks as pessimism peaks: Barclays

A buy signal seen only four times in the past 12 years is flashing again in emerging market stocks, according to Ian Scott of Barclays Capital.

Things got so bad, they're going to turn around, according to the London-based equity strategist. In the worst quarter for equities in four years, money flows in emerging-market funds are trailing developed nations by a degree unmatched except in 2004, 2005, 2008 and 2014, Scott says, citing EPFR Global data. Yet, on every one of those occasions, shares outperformed developed markets by at least nine per cent in the following six months, he says.
 

A repeat of that performance would come as a relief to markets battered by a $6-trillion meltdown since this year's high in April amid concern a slowdown in China will apply brakes on global growth and a potential increase in US interest rates will lead to a flight of capital from riskier assets. That spurred investors to withdraw almost $10 billion from emerging market funds this month through the 23rd, even as they added $15 billion to funds focusing on advanced nations, according to EPFR.

"The degree of selling relative to developed-market equities is about as negative as it gets," Scott, the head of equity strategy at Barclays, said in an interview September 24. "At this point, emerging-market equities have responded by outperforming over the next six to 12 months. I think this is going to repeat itself." Scott recommended buying emerging market stocks in June, when Barclays raised its recommendation to overweight, the equivalent of buy. Since then, the MSCI Emerging Markets Index has declined 20 per cent. Scott said by e-mail September 30 that he stood by his position. "As for the further underperformance, the flows were not so extreme at the end of June, so with the benefit of hindsight we should have waited until things had deteriorated further," he said.