The keynote speaker for today’s CBOE RMC Europe conference was David Hauner who is the Head of EEMEA Cross-Asset Strategy and Economics at Bank of America Merrill Lynch. His presentation was titled Emerging Markets: Attractive Investment of Global Systemic Risk? I found this particularly interesting as I closely monitor the CBOE Emerging Markets ETF Volatility Index (VXEEM) as well as the CBOE Brazil ETF Volatility Index (VXEWZ) as part of my duties for CBOE.
Hauner began showing a survey indicating that a sell-off in US treasuries is the biggest perceived risk for emerging market stocks.
He touched on volatility saying that VIX normally does not pick up until after interest rates start to rise, based on his interest rate outlook he believes VIX will stay low until well into 2015.
The weak Euro has helped fund the emerging markets while the USD has not been a contributor to emerging market performance. A breakdown of the Euro – emerging market carry trade could be negative for emerging markets.
Emerging Market GDP growth is running at 5% and BofA Merrill Lynch model expects the same levels to continue – this translates to half of global GDP growth coming from emerging markets. He sees 5% growth becoming the new normal. The expectation is that Chinese GDP growth will trend down to 6% from a current growth rate of around 7.5%. What he sees is China managing down growth while trying to avoid any sort of hard landing. The government is managing this through periods of mini-stimulus to cushion the fall. On a trading basis he suggests fading optimism as well as fading pessimism in China – the Chinese market has been and will continue to be a range trade.
Regionally, he sees economic improvement in central and eastern Europe (Czech Republic, Poland, and Hungary) while South America is on the other end of the spectrum (Argentina, Venezuela, Peru, and Brazil). Also, foreign holding of Latin American and Asian debt has consistently trended higher over the last three years. EEMEA debt holdings topped out in the summer in June 2013 and has been trending slightly lower.
BofA Merrill Lynch monitors emerging market inflows and outflows. The level of this indicator recently gave a sell signal which backs up Hauner’s near term outlook. He follows up by saying that for the long term a correction will offer a good buying opportunity.
Sentiment is positive for China and Indonesia but pretty much negative for all other areas of the emerging market sector. He believes Chinese weakness could impact the whole emerging market sector. Currently he would overweight exposure in China, South Africa, Taiwan, and Indonesia. Finally he would underweight Poland, Philippines, Mexico, and Malaysia.
He finished up with brief comments on investing in Russia. He stated we are at a point where a positive breakthrough in the Ukrainian situation needs to be seen before buying Russia. He cautions against trying to buy in anticipation of any agreement as the situation continues to be very chaotic.