Have a long-term view on India

By Morningstar Analysts |  15-05-17 | 

Billionaire Jeffrey Gundlach, CEO and CIO of DoubleLine Capital, advised investors to go long on emerging markets and short on U.S. stocks at the 2017 Sohn Investment Conference held last week in New York.

According to him, the valuation of emerging markets is half that of the S&P 500 Index (he’s mainly focusing on the price-to-sales and price-to-book value ratios of the S&P 500, which indicates a higher valuation compared to emerging markets). He also said that his investment decision is based on the funds flow to the active and passive management strategy, explained Market Realist. Gundlach has been a fan of India for the long term and at the Barron’s Roundtable earlier this year he reiterated his stance.

Christopher Wood, CLSA’s chief equity strategist, believes that India remains the most preferred equity story in the emerging market universe on a 10-year view with the government’s renewed focus to address asset quality problems in the banking sector strengthening this stance. Though he cautioned that a sharp correction should not take anyone by surprise given the strong recent run the market has experienced.

The Financial Times quoted data from the Institute of International Finance, or IIF, which stated that cross-border flows to EM bonds and equities topped $20 billion for the third consecutive month in April 2017, making this their biggest three-month positive streak since 2014.

IIF offers three answers to what’s driving the flows:

  • A cyclical upturn in the global economy
  • Central bank liquidity
  • Persistent savings glut

Variant Perception suggests caution in a post titled Stretched sentiment leaves EM vulnerable. 

Liquidity conditions have deteriorated meaningfully for EM equities.

The left chart below shows that the steep drop in G7 Excess Liquidity points to a risk of much lower EM equity prices in about 3-4 months’ time. This materially worse backdrop for EM equities is happening just when investors are piling into EM assets.

The right chart below shows that EM bonds and equities are seeing the largest ETF inflows over the last three months. Although, we are selectively positive on some specific EM markets, overall we believe investors should rotate away from broad EM equities exposure.

Click on image to enlarge.


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