Euphoria in Emerging Markets Is Over, According to $119 Billion Japanese Fund

Updated on
  • Poland, Czech Republic, Malaysia, Mexico among favored markets
  • Investors are becoming selective and pace of gains will slow

The days when you could buy almost anything in emerging markets and expect to reap returns are over.

That’s the message from Hideo Shimomura, the chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co., which oversees $119 billion in assets.

According to Shimomura, the sell-off in equities that was triggered by last week’s stronger-than-expected jobs report has given investors a wake-up call. With the data stoking speculation that an acceleration in U.S. inflation will prompt faster or more frequent interest-rate increases, new Federal Reserve Chair Jerome Powell’s forthcoming testimony to Congress in late February has become key to determining where markets are headed, he said.

“We’re not going to see the type of euphoria we saw in emerging markets anymore,” Shimomura said in a phone interview from Tokyo. “We’re in a phase where investors are being given a reality check after a great run. That’s not to say inflows to emerging markets will reverse completely.”

While bulls are still arguing for an eventual rebound in emerging markets, investors are becoming increasingly selective after a bumper January. Developing equities reached multi-year highs and currencies and bonds soared to record levels last month. Funds have already pulled almost $4 billion from developing economies since Jan. 30, the biggest slump in portfolio flows since the 2016 U.S. presidential election, according to the Institute of International Finance.

Below are some of Shimomura’s picks:

  • Eastern Europe such as Poland will remain attractive as they benefit from solid growth in the region
  • Malaysia, which has been a laggard, stands out due to a balanced export sector
  • Mexico could become attractive after the presidential election later this year as inflation is expected to slow

The MSCI Emerging Markets Index of shares snapped a four-day loss, after posting the biggest drop since November 2016 Tuesday. A gauge tracking their currency counterparts rose 0.4 percent as of 9:15 a.m. in London, halting four days of declines.

“Stock markets definitely needed a correction after rapid gains in January,” Shimomura said. “But in an environment with solid global growth and steady fundamental conditions, this correction shouldn’t be so deep for emerging markets.”

— With assistance by Dana El Baltaji

(Updates prices in the penultimate paragraph.)
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