Owning Emerging-Market Assets Is Playing With Fire, SocGen Says

(Bloomberg) -- Emerging-market investors should shift to safer assets over the medium-term, as a surge in volatility is coming, according to Societe Generale SA.

Softer global growth, rising fears of a crisis and higher policy uncertainty will likely lead to a turbulent market environment, wrote strategists including Jason Daw in a note Thursday. At current valuations, investors are not being sufficiently compensated for late-cycle tail risks, they argued.

“We are entering a dangerous and higher volatility phase for emerging markets,” they said. “Owning EM assets, especially if just for carry, at this stage of the cycle is playing with fire.”

Developing-nation bonds and currencies have had a volatile two months, first slumping on renewed fears of a synchronized global slowdown and re-ignited U.S.-China trade tensions, then recovering on increased bets of central bank stimulus. The Bloomberg Barclays EM Local Currency Total Return Index has risen about 3% since mid-May, and the MSCI Emerging Markets Currency Index is up about 0.8%.

Developing nation currencies should weaken over the next six to 12 months, with downside risks including trade tensions, investor positioning and unattractive rate spreads, the strategists argued. That will have a knock-on effect in fixed income markets, and justifies an underweight position in local-currency emerging market bonds, they wrote.

Read how emerging-market equities are underperforming but becoming more expensive

While lower U.S. rates can help EM bond markets in the short-term, the strategists hold a more bearish view than consensus further out, they said.

“Wait for better opportunities once growth momentum improves and EM yields become attractive relative to the U.S.,” the strategists wrote.

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