Schroder Joins Goldman Calling End of Emerging-Market Trough

  • Dollar needs to stop climbing for developing nations to gain
  • Sentiment hasn't been so bearish in three decades, Conway says

The dollar is nearing its peak, signaling that the time to turn bullish on emerging markets is approaching, according to Schroder Investment Management.

Three years of trailing advanced markets has made developing-nation equities attractively priced and ready for a rally, Allan Conway, who helps manage $23 billion in emerging and frontier equities at Schroder, said in an interview in London. The missing piece is a pause in the dollar’s rally which will happen once investors are convinced that U.S. interest rates will remain low for longer beyond the liftoff, he said.

“If we’re not at the top of the dollar, we’re very close to it now,” Conway said. “We’re not saying you really must put money into emerging today. But given how cheap these markets are, given the underperformance, given the under-ownership, given the bearish sentiment -- at the very least go neutral, looking for that timing to go overweight.”

Conway joins a growing number of market prognosticators from Goldman Sachs Group Inc. to Bank of America Corp., becoming less bearish on emerging markets. MSCI Inc.’s emerging stocks benchmark is headed for a third year of losses, triggered by a slowdown in China and uncertainty about the Federal Reserve interest rate increase, seen sapping demand for riskier assets.

For the recovery in emerging-market assets, the U.S. dollar needs to stop climbing, Conway said. The greenback’s gain to a 12-year high this year has been a downer for emerging-markets stocks that have lost 15 percent, according to Bloomberg and MSCI index data.

Most forecasters see the dollar nearing a peak. The currency will appreciate to $1.05 per euro by the end of next quarter before leveling off through the remainder of 2016, according to the median of more than 50 estimates compiled by Bloomberg. The U.S. currency was at $1.0809 per euro at 2:35 p.m. in London.

Conway defended his holding in China and Hong Kong, which accounted for 26 percent of Schroder’s Global Emerging Market Equity Fund by the end of October. The $1 billion fund lost 7.2 percent this year through Oct. 30, compared with a loss of 8.6 percent for the emerging-markets benchmark, according to Schroder.

The bet on China has “been absolutely the right decision,” Conway said.

Conway shifted his neutral position in Russia to a small overweight in November on easing of political tensions with the U.S. and to benefit from the cheapest equity valuations in the world, he said. He also cut Indian holdings to neutral from overweight, as they became relatively expensive.

 “In 35 years of covering these markets, I can’t recall such blanket bearishness,” Conway said. “We are ripe for a significant rally.”

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