Henderson’s O’Connor sounds caution on emerging market equities

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Henderson multi-asset director Paul O’Connor continues to be “cautious” of emerging market equities, as the negative sentiment surrounding Chinese growth spreads across the region leaving the asset class “vunerable to any adverse economic shocks”.

O’Connor notes that while markets are still “uneasily” weighing up the positive and negative impact of US macro trends, there is a more distinct pessimistic attitude toward prospects for the Chinese economy.

He says: “The contrast here is between US policymakers who are expected to normalise policy in a gradual way.

“This recent hawkish reappraisal of Chinese policy priorities has only reinforced the negative trend in sentiment regarding Chinese growth that has been in place for over a year.”

This situation in China is “now a broader emerging market phenomenon”, according to O’Connor, with company earnings forecasts and GDP being revised down elsewhere in the region too.

He adds: “The retrenchment of foreign capital from some emerging markets and policy actions in others are tightening credit conditions at a time when growth is already weakening. The key risk is that macro fundamentals deteriorate further, leaving the asset class vulnerable to any adverse economic shocks.”

The underperformance of emerging market equities relative to developed markets as a result of this backdrop may mean that valualtions look “relatively attractive” but this is not enough to renew O’Connor’s interest in the region at present.

He says: “We remain cautious and suspect that there will be better buying opportunities in the future.”

Looking ahead O’Connor also adds that it looks unlikely the Chinese authorities will release a stimulus package in the near term, something which makes it “difficult to dispel” the concerns for emerging markets and is “likely to overshadow emerging market stocks for some time to come”.