Contrarian Who Saw Emerging-Market Rally in Gloom Pulls Back

  • Pictet’s Paolini cites burgeoning risks from Brexit to China
  • Year-to-date gains on benchmark MSCI index almost wiped out

Pictet Asset Management’s Luca Paolini, among the few forecasters who correctly predicted this year’s emerging-market stock rally, is pulling back because of a myriad of risks from the possibility Britain will vote to leave the EU to flagging global growth.

The chief strategist at Pictet Asset Management in London, the only one of 12 global investors and analysts surveyed by Bloomberg in December with an overweight call on emerging-market equities, cut his recommendation to neutral at the end of May.

“Given all this risk -- Brexit, the Fed, China -- we want to make sure that the weakness in the dollar, the recovering global growth and a very dovish Fed will be confirmed in the next few months,” said Paolini, whose firm runs 108 billion pounds ($153 billion) of assets. “A lot of the key catalysts for a rally have already been in place and now it’s less obvious what is going to happen.”

In December, Paolini was a lone bull adding emerging-market stocks in a period where most managers avoided riskier assets as a collapse in commodities coincided with the first U.S. interest rate increase in a decade. Sentiment shifted after a recovery in crude prices from a 12-year low in January triggered a rally of as much as 24 percent in developing-nation stocks.

For more on asset manager survey in December, click here.

Now, investors are losing appetite for riskier assets as speculation intensifies Britain will vote to renounce European Union membership in a vote next week and traders await a decision on interest rates by the Federal Reserve Wednesday.

The MSCI Emerging Markets Index has almost wiped out this year’s gains. The gauge dropped 0.9 percent to 804.09 by 4:30 p.m. in London, paring 2016’s advance to 1 percent.

Paolini said he needs to see clear signs of improvement in global capital expenditure, Chinese private consumption and upside surprises in economic fundamentals before recommending buying more developing-nation stocks once again.

Developing-nation assets still have relatively attractive valuations and faster growth rates compared to developed markets, Paolini said. Emerging-market stocks and bonds can outperform over five years, he said.

"We shouldn’t give up on emerging markets,” he said.

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