BlackRock Inc has retained its neutral view on emerging market equities while being bullish on developed economies, as per a note released by the world’s largest asset manager on March 29.
“We are neutral EM equities and prefer DM equities, given more challenged restart dynamics, higher inflation pressures and tighter policies in EM,” the asset manager said.
BlackRock’s outlook on emerging markets suggests foreign investors could dump expensive markets such as India for better bargains in markets like the US, Japan, Brazil and China.
Indian equities have seen seven months of outflows from foreign investors in one of the longest selling spells from the cohort in their three-decade investment history.
Foreign investors have withdrawn close to Rs 2 lakh crore from the domestic secondary market in the past seven months as rich valuations coupled with hawkish US Federal Reserve and geopolitical crisis in Europe dampened sentiment.
According to market participants, Indian equities also suffered as they outperformed other emerging markets and some developed markets in a large part of 2021 as foreign investors booked their winners to make up for steep losses in China and Russia.
While BlackRock may be neutral on emerging markets in the near term, it remains bullish on equities overall seeing central banks’ response to high inflation as not restrictive of economic growth.
The US Federal Reserve earlier this month raised interest rates by 25 basis points for the first time since 2018 amid multi-decade high inflation in the country. Fed chief Jerome Powell has indicated that the central bank is prepared to raise rates by a higher quantum from June as it looks to anchor inflation expectations.
“Incorporating climate change in our expected returns brightens the appeal of developed market equities given the large weights of sectors such as tech and healthcare in benchmark indices,” BlackRock said.
The asset manager is bearish on fixed income markets across the world as it expects a steepening of the yield curve. “We see investors demanding higher compensation for holding government bonds amid rising inflation and debt levels,” the US-based fund manager said.
That said, BlackRock prefers corporate debt in emerging markets due to its attractive valuations and potential income. However, the asset manager is underweight on corporate credit due to prospects of higher interest rates.
BlackRock analysts warned, however, that there is a substantial risk of high inflation in western economies cutting loose and triggering a harsh policy response from central banks.
“The big risk we see: higher near-term inflation becomes embedded in expectations, forcing central banks to slam the policy brakes with sharply higher rates, crushing demand to reset expectations,” BlackRock said.
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