HSBC’s third Emerging Markets Sentiment Survey reveals that nearly three-quarters of the 186 investors surveyed are now ‘bullish’ on EM prospects over the next three months, which is the highest rate since the start of our survey in June last year. In terms of investments, 36% of respondents expect to put more cash to work in the near term, up from 30% previously, but 11% still project an increase in their cash holdings, unchanged from the September survey. COVID-19 still tops the list of potential major setbacks for EM, although 61% of the respondents believe the recovery in the global economy has already started or will start in the first half of this year.

The survey had more than 40 questions and was conducted between 16 November 2020 and January 2021 among 186 investors from 174 institutions representing USD641bn of EM assets under management (AuM). The fieldwork mostly coincided with a strong risk-on tone in financial markets after the US presidential elections and amid various advances on the vaccine front.

HSBC has an optimistic view on EM in 2021, although we are wary of potential pitfalls that could disrupt the EM outlook1. Our EM FX Strategy team sees the glass as half-full for EM FX, which is also underinvested by real money investors.

Risk appetite: We asked again what level of risk investors were willing to take at the current juncture, where 0 is ‘no risk’ and 10 is ‘highest risk’. The average score increased to 6.87 from 6.46 in September (and 5.97 in June), perhaps indicating that the strong bullish sentiment has not yet fully translated into actual risk-taking.

Fundamentals: Nearly 90% of the respondents expect EM growth to improve over the next 12 months, while two-thirds project higher inflation, although 72% see unchanged policy rates.

Strategy: Asia still leads the pack, but investors have nearly doubled their overweight positions in LatAm compared to the September survey. The share of respondents expecting EM FX to appreciate has also almost doubled, while the preference for local currency debt has picked up a bit further. The positive sentiment towards EM equities has taken another leap with 84% of respondents expecting the asset class higher over the next three months (67% in September), while 75% think EM equities will outperform DM equities (55% in September).

In this edition, we have also asked a question about the impact of the US election outcome. As the survey was mostly conducted before the Georgia run-off, 55% of the investors thought a “blue sweep” would be good for EM versus 50% for a Biden presidency with a split Congress. Interestingly, 23% of investors saw the “blue sweep” as negative for EM versus only 7% for a split Congress. We believe this reflects different views on the signal this outcome sends for risk appetite, i.e. the battle between optimism based on the growth impact of a bigger fiscal stimulus versus pessimism that such actions might lead to higher US yields.

ESG: There has been a significant increase in ESG engagement; respondents running an ESG portfolio directly or party/indirectly is now at 50%, up from c40% in September and 30% in June’s survey. Integration of ESG analysis in stock selection and weighting methodologies as well as engagement on ESG themes are the most frequently cited responsible investment activities. The ranking of ESG key risks has not changed: climate change, inequality and minority shareholder protection.