To say that emerging markets faced a tough year in 2013 would be putting it mildly.
The Fed’s mid-year taper announcement and current account deficits roiled emerging market currencies – some lost nearly 20% – and panicked investors rushed for the exits, causing the MSCI index to fall 5% and bond returns to move into negative territory. 2013 was clearly the ‘annus horribilis’ for emerging markets.
Looking ahead to 2014, political concerns are likely to take center-stage compared to the fiscal and currency worries that pummeled emerging market equities in 2013.
Voss Capital is betting on a housing market boom
The Voss Value Fund was up 4.09% net for the second quarter, while the Voss Value Offshore Fund was up 3.93%. The Russell 2000 returned 25.42%, the Russell 2000 Value returned 18.24%, and the S&P 500 gained 20.54%. In July, the funds did much better with a return of 15.25% for the Voss Value Fund Read More
Emerging market countries to hold elections
As many as five major emerging market countries – Brazil, India, Indonesia, Turkey and South Africa – are scheduled to hold elections in 2014. Elections often lead incumbent leaderships to announce populist measures that erode fiscal strength. New political leaders take time to assess the economic situation and as a result urgent reforms are relegated to the back seat.
Elections apart, political instability in countries such as Turkey and Thailand is also curbing investor appetite for EM assets.
Economic conditions in large economies such as China also have a rub-off impact on EM equities. Last week, we saw a massive EM selloff triggered by disappointing PMI numbers from China.
Given these somewhat worrisome issues relating to the outlook for global emerging markets (GEM) for 2014, we turned to SocGen’s monthly survey of big-ticket investors’ attitudes to GEM for December.
Hedge funds and real-money investors remain bullish
According to Benolt Anne, SocGen’s Head of Emerging Markets Strategy, investors remain bullish on emerging markets – both in the short term (two weeks) as well as the medium-term (three weeks), as shown in the charts below.
Real money more bullish than hedge funds
However, there’s one crucial difference that is not apparent from the above charts – real money investors (traditional investors such as pension funds, mutual funds and endowments) are more bullishly inclined towards EM compared to hedge funds.
In the medium-term, 63.6% of real money investors were bullish compared to 46.5% for hedge funds. In the short term, 50% of real money investors were bullish compared to 46.5% for hedge funds.
Sentiment and positioning
Significantly, both hedge funds and real money investors felt that they were over-invested in EM, and they would ideally to see lower levels of exposure.
As seen in the above charts, 49% of hedge funds felt they were over-invested, while 39% of real money investors thought they were over-exposed.