BlackRock Goes Bullish on Emerging Stocks as Profits Improve

A Deep Dive into Emerging Markets With Richard Clarida
  • Sees room for more inflows amid light investor positioning
  • Raised developing-nation bonds to overweight seven weeks ago

The world’s largest asset manager has turned bullish on developing-nation stocks after a three-month rally that pushed the benchmark index to the highest levels in a year.

BlackRock Inc. upgraded emerging-market equities to overweight from neutral, citing improved fundamentals and a stable outlook for the dollar as the Federal Reserve moves slowly in raising U.S. interest rates. The firm, which manages a total of $4.9 trillion of assets, similarly raised its outlook on developing-nation bonds last month.

The MSCI Emerging Markets Index is on pace for a third consecutive monthly gain as rebounding commodity prices and eased concern that the Fed will quicken the pace of U.S. monetary policy tightening increase the appeal of riskier assets. Fundamentals for developing-nation companies, which trade at a 24 percent discount to developed peers on a forward earnings basis, may improve further as they focus on controlling expenses and targeting profits, BlackRock’s Global Chief Investment Strategist Richard Turnill said in an e-mailed note Monday.

“A stable U.S. dollar, economic reform momentum and improving corporate fundamentals support the asset class,” Turnill said. “Investors have been warming up to emerging markets since February, and their risk appetite appears to be broadening.”

Sentiment toward emerging-market debt has been turning more positive this year among asset managers from JPMorgan Chase & Co. to Franklin Templeton as the Bloomberg Emerging Market Sovereign Bond Index rallied 15 percent. Investors have been more cautious in raising projections on developing-nation equities, which are often perceived as riskier than fixed-income securities.

More than half of the 470 companies in the MSCI benchmark index that have reported second-quarter earnings beat analysts’ estimates, data compiled by Bloomberg show. Earnings in emerging companies are projected to rise 14 percent in 2017, compared with 13 percent among those in developed nations.

The improved profit outlook spurred a $26 billion inflow into developing equity exchange-traded and mutual funds since February, Turnill said, citing data from EPFR Global. Investors have added $16.2 billion into U.S.-based emerging exchange-traded funds this year, compared with a $2.9 billion outflow in 2015, data compiled by Bloomberg show.

BlackRock’s upgrade of equities comes seven weeks after the money manager increased its outlook on developing-nation bonds to overweight.

The MSCI emerging-market equity index retreated 0.7 percent Monday as commodity prices dropped and traders boosted bets for an increase in U.S. interest rates. Fed Vice Chairman Stanley Fischer indicated that a 2016 rate move is still under consideration as the U.S. economy is already close to meeting central bank targets. The gauge has rallied 15 percent in the past three months.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE