13 December 2018

Emerging Market Stocks Coming Back In Favor

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Investors looking to escape the recent tumult in the technology sector are snatching up stocks in another beaten-up corner: emerging markets. 

The latest monthly survey from Bank of America Merrill Lynch shows investors’ allocation to emerging-market equities jumped to 13% in November from 5% in October.

At the same time, their allocation to the global tech sector slid to the lowest level since February 2009, with 18% of investors saying they were overweight in the sector, compared with 25% last month, BAML’s survey found.

That marks a change in sentiment from earlier in the year when investors shunned emerging-market assets as the dollar rallied amid global trade tensions. When the dollar climbs, everything that gets priced in other currencies becomes cheaper, including foreign stocks such as those in emerging markets.

The BAML survey suggests investors took advantage of the recent stock-market turbulence to look for bargains: cash allocations among fund managers fell to 4.7% in November from 5.1% in October. Fund managers typically increase cash positions during times of volatility if they are concerned about risk.

“We’re in the midst of a major reset of investor sentiment and positioning,” said Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist. “But the pain threshold hasn’t been breached yet,” he said, adding the current stock-market volatility hasn’t yet significantly affected the credit and housing markets.

Since Oct. 1, the MSCI Emerging Markets Index has fallen 8% compared with the technology-heavy Nasdaq Composite’s loss of 11%. The MSCI EAFE Index, which measures developed countries outside the U.S. and Canada, has also lost 8% in the same period.

As investors rotate out of highflying technology names, Brian Sterz, portfolio manager at Miracle Mile Advisors in Los Angeles, said his firm has recently been moving more into emerging markets and developed international stocks.

Within emerging markets, Mr. Sterz said he likes Brazil, adding its economy took the brunt of the pain earlier this year and the country is in a recovery phase. His firm has also recently invested in several emerging-market exchange-traded funds.

“We want to buy things when they’re coming out of the doldrums and their valuations are cheap,” he said.

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