Tuesday, August 16, 2011

Survival guide for EM investing includes lots of cash, bonds and yuan - MarketWatch (blog)

In the wake of a tumultuous ride in global markets, HSBC said its “cautious, yet constructive approach,” to emerging markets includes a recommendation to investors to keep an overweight position in cash, and to favor fixed income over equities.


“EM equities are unlikely to rebound consistently until economic data show activity is bottoming, while we believe EM fixed income is a good safe haven due to strong balance sheets,” wrote Pablo Goldberg, HSBC’s global head of emerging-markets research, and Bertrand Delgado, an emerging market strategist, in a note to clients Monday. Emerging-market equities had declined 14% since the S&P 500 Index’s SPX peak on July 21, and their correlation with the index had climbed to nearly 93% since June, they said. A exchange-traded fund that tracks the major benchmark for emerging-markets stocks, the iShares MSCI Emerging Markets Index EEM , lost 13% from July 21 to Friday’s close.


In an “emerging-markets survival guide,” the HSBC analysts outlined three reasons for the fixed-income preference. HSBC’s purchasing managers indexes suggest further weakening of economic activity, they said. Global emerging-markets analysts haven’t “cut earnings estimates at all, still at 14% growth this year and next,” and the rally in the U.S. Treasury market “provided renewed relative valuation to bonds,” while the sell-off in the S&P 500 Index could serve as competition to EM equities in a rebound. In fixed income, stay long local rates and favor the front end, HSBC suggested.


Additionally, HSBC said it favors Asian currencies and currencies with positive current account positions, as the fiscal and debt crisis in the eurozone and the U.S. is “ultimately negative” for both greenback DXY and euro EURUSD. Currencies with positive current account positions, “solid” foreign-direct investment flows, and positive economic growth include China’s offshore yuan, or CNH, the Indonesia’s rupiah USDIDR, Singapore’s dollar USDSGD, Malaysia’s ringgit USDMYR, and Brazil’s real USDBRL, among others.


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“Super-loose monetary policy in the U.S. is a springboard,” from which EM bonds, currencies, and equity “could quickly rally once the dust settles,” said HSBC.


Overall, “risk aversion wins for now. Hence we expect the performance of emerging markets to remain hostage to developments outside the asset class.”


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