Global chief investment strategist Richard Turnill said BlackRock has taken the decision to upgrade its view on EM equities because growth across the countries within the asset class has stabilised amid a pickup in global growth, and a lower-for-longer interest rate environment.
This rate environment and outlook ‘reduces the risk of a sharply rising US dollar’ and expands the scope for emerging market rate cuts, Turnill explained. There have been 25 so far this year, which is making high-yielding EM assets relatively attractive, he noted.
Investors have been ‘warming up to emerging markets since February’ and their risk appetite appears to be broadening, Turnill explained. Even offshore Chinese equities, which have lagged other parts of the asset class, have started to catch up despite weaker economic data from China in July.
Turnill also noted that EM equity exchange-traded and mutual funds have attracted $26 billion of inflows since February, still only a fraction of the roughly $150 billion that had exited the asset class since the 2013 taper tantrum.
He said that given this, BlackRock sees room for further inflows. Asian investors are already rotating into equities as local bond yields have dropped to new lows, with EM equities trading at a 24% discount to global developed markets on forward earnings multiples.
Fundamentals could further improve further in Turnill’s view as EM companies focus on controlling expenses and targeting profits over market share gains.
Within EM equities BlackRock prefers countries showing economic improvements or having ‘clear reform catalysts’, including India and the ASEAN countries.
Risks to the asset class noted by Turnill include a spike in the US dollar, renewed weakness in commodities and economic risks in China.