A research note from Morgan Stanley points out that Aberdeen’s emerging market, Asia-Pacific and global funds were hit by “sharp further deterioration” in the final quarter of 2013 and says it is “increasingly nervous” about what the future holds for the group.
“We downgrade Aberdeen to underweight as we are concerned that the deterioration in key fund performance will exacerbate an already pressured macro situation in EM and raise the risk of sustained outflow pressure from the core equities franchise,” the investment bank’s analysts say.
The research says that the challenges facing emerging markets – such as excess credit, the unwinding of China’s leverage and tapering in the US – are well understood. However, it adds that there is no “quick fix” for these structural challenges, which could hamper Aberdeen’s funds.
In addition, the typical delay in clients responded to periods of weaker performance suggests to Morgan Stanley that “the risks to Aberdeen flows have not passed”.
“We recognise that, given weak YTD performance, market nervousness on the growth outlook has to some extent already been baked in,” the note says. “However, we believe the sharp further deterioration in key fund performance in Q4 2013 increases the likelihood that consensus expectations of a recovery in equity flows over FY14/15 will prove optimistic.”
However, Morgan Stanley’s analysts point out that Aberdeen’s fund flows remained positive in 2008 and 2011, when other emerging market funds were seeing strong outflows, owing to the stickiness of its institutional clients and its relative performance.
Furthermore, they recognise the potential for Aberdeen’s funds to “snap back” from their bout of underperformance – as its Asia-Pacific funds did in 2007.
But the note adds: “We are nonetheless increasingly nervous, particularly given what we see as over-optimistic conclusions of consensus following the recent interim management statement.”