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Allocation strategies in emerging market stocks

Global emerging market (GEM) equities will receive a boost if Spain seeks financial help from the ECB, but some emerging markets will fare better than others, say analysts.

In a recent report released by HSBC, analysts argue that the next key issue for global emerging market (GEM) investors balances on the difference between policy direction in Europe and the US with that of China:

“... while monetary policy in the US and in the eurozone is becoming increasingly pre-emptive, in China monetary adjustment has been much less comprehensive.”  

With GEM closely attuned to the US and Europe, the main driving force for GEM equities now will arrive if Spain bites the bullet and asks the eurozone for financial assistance – which HSBC believes will happen in October. It says:

 “...within the GEM universe, countries and sectors sensitive to the US and eurozone should outperform China-related stories, which are only likely to get strong traction when there is greater clarity on Chinese politics and policy.”

HSBC sees the most opportunity in markets and sectors sensitive to the eurozone that have not already performed strongly, such as Russia and low-beta markets Egypt and Turkey.

To a certain extent, this sentiment is reiterated by Renaissance Capital in their updated quantitative research report:

 “Supported by renewed monetary easing, EM markets performed well since our previous update on August 28 and price momentum across most EM markets turned positive in September. Some markets, including the Philippines, South Africa and India, are trading close to their 52-week highs. For the third month in a row, Egypt was the top-performing EM over the past month (to September 24), while the MSCI Morocco Index fell 4.4%. The MSCI Malaysia and Czech Republic were the only other indices that fell during the month.”


 “During the month of August, which is the latest allocation information available, emerging market funds cut their cash allocation further, maintaining a below-average position, according to data from EPFR. Funds increased their allocation to Russia and India to increased overweight positions, while reducing the overweight position in Brazil to neutral. GEM funds reduced their relative exposures to South Africa and China, and moved even more underweight in these markets. Funds remained underweight in Poland and were overweight in Russia, India and Turkey.” 

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