Societe Generale: Bullish sentiment on emerging markets is eroding

World currencies

The bullish sentiment on emerging markets is eroding, Societe Generale said after recent client visits in Europe and Hong Kong.

“Investors are, on balance, still constructive on emerging markets, but not as much as before,” the bank said in a note on Monday.

It said clients used language such as “concerned,” “selectively bullish,” “less opportunities” and “greater two-way risks” to describe the emerging market outlook.

“Also, the number of clients in the bearish camp (approximately 20 percent) has increased compared to late-last year when basically everyone was bullish,” it said.

Trade wars

The two primary concerns of clients were trade wars and U.S. interest rates, it said.

“There was no clear consensus on the topic of trade wars; we are in the camp of it being dollar negative up to the point where it hurts actual growth or expectations,” it said. “There was greater concern about the impact of U.S. interest rates on emerging markets compared with 3-6 months ago.”

But Societe Generale noted that investors agreed that this is not 2013. In 2013, when then U.S. Federal Reserve chief Ben Bernanke first broached the idea of tapering the quanitative easing program, it sparked a global market rout that struck emerging markets particularly hard, especially those with current account deficits. Higher yielding emerging markets had benefited from fund inflows from the U.S., where interest rates were extremely low, but the prospects of the cheap-money taps being turned off had sent those funds into reverse.

But the bank noted that emerging market fundamentals are now better than in 2013, but added, “eventually the reduction of unprecedented monetary stimulus will stress financial markets or economies.”

Client picks

Clients favored receiving the front end in South Korea and India, but were negative on the Philippine peso and were “confounded” on why Indonesia’s rupiah has been doing poorly, the bank said.

The bank also pointed to an unusual interest among clients: Mexico’s peso.

“Growing chorus that believe Mexico’s peso could be the trade of the year given that election risks are overpriced, but as of a couple weeks ago nobody seemed to have it on,” it said. In other Latin American bets, clients were “neutral-to-bearish” on Brazil’s real.

In other regions, the bank said clients were “constructive” on South Africa, while being “unanimously bearish on Turkey”  amid sticky inflation, geopolitics and rising domestic political risks.  It said clients didn’t have much focus on Russia’s ruble.