| LONDON, April 17
LONDON, April 17 The brave few who waded back
into emerging markets in March reaped substantial rewards, but
investors say it is too soon to tell whether the recent bounce
will become a sustained rally.
After three years of underperformance had left them at
rock-bottom valuations, emerging markets enjoyed a surge in the
early days of the northern spring.
Sovereign debt spreads closed to their narrowest over U.S.
Treasuries since May 2013 - just before then-Federal
Reserve Chairman Ben Bernanke hinted the Fed would scale back
its monetary stimulus, frightening investors in risky assets.
After falling 5 percent in 2013, emerging stocks
bounced 9 percent and moved into the black for 2014. Now they
are beating developed-world stocks.
Emerging market equity funds saw their biggest inflow in
over a year last week, according to Boston-based fund tracker
EPFR. Banks such as Barclays, Citi, HSBC, Morgan Stanley and
Societe Generale started to recommend buying emerging markets by
the beginning of this month.
"Performance has been particularly good in the very short
term," said Iain Stealey, who manages global bond strategies at
JPMorgan Asset Management and has been adding emerging debt
positions since the start of the year, though he also said that
"volatility is going to be quite high".
Not everyone took advantage of the rebound. The average
allocation to emerging markets by international equity funds
rose marginally in February, according to Lipper data - to 10.7
percent from 10.15 percent. Only four funds raised exposure to
emerging markets by 2 percentage points or more over that time,
Lipper's most recent data show.
But a Bank of America-Merrill Lynch survey showed investors
cut their extreme bets against emerging markets in April,
suggesting many more investors have latched on to the trend.
A net 2 percent of fund managers are underweight emerging
markets, compared with a net 21 percent in March. The net
reading is the difference between overweight and underweight
positions. The survey also showed investors thought emerging
markets to be the most undervalued in 13 years.
(For GRAPHIC comparing emerging and developed market
valuations, see http;//link.reuters.com/rut87v)
One investor who profited was Loomis, Sayles & Co, which
opened an emerging debt fund in February, its first U.S. mutual
fund focused on developing economies.
Emerging market funds had been going out of fashion, though,
with only 10 new ones launched in the first three months of
2014, according to Lipper. In 2011, a strong year for the
sector, 200 new emerging market funds launched.
But Shaw Wagener, a portfolio manager at U.S. investor
American Funds, opened an emerging growth and income fund only
"It's a great time to launch a fund if you have a long-term
focus in mind," he said. "A lot of companies have cut back on
capital expenditure, people are starting to manage more for
profit and we may see earnings growth bottom out."
Others are implementing tactical and sophisticated trades to
benefit from volatility in hotspots like Turkey, whose reliance
on external capital has led to a sharp decline since last year.
Andy Warwick, who manages a multi-portfolio fund at
BlackRock, has made a number of long and short trades in Turkish
equities - buying and selling in a matter of weeks - since
September to benefit from volatility, before putting in place a
long position in January.
"From a tactical point of view, Turkey looked very cheap and
the central bank was tough in fighting the currency. It made
markets more comfortable there's value there," Warwick said.
"We continue to run that long position... It's about being
tactical and (finding a way to) capture and embrace volatility."
Turkish stocks have risen more than 20 percent
since late January as a surprise interest rate rise restored
confidence in Turkey's financial system.
A corporate bond rally in Brazil and India helped DoubleLine
Capital's Emerging Markets Fixed Income Fund beat 90 percent of
its peers this year, according to data from Morningstar.
But investors say it is too soon to call a rally in emerging
markets. Indeed, stocks and bonds weakened from their highs this
week, and some investors said they were cutting positions again.
The bounce did not reflect strength in the economies in
emerging markets, investors said. Risks were seen particularly
in emerging powerhouse China.
"The recent rebound was two-thirds technical and one-third
fundamental," said Patrice Lemonnier, head of emerging market
equities at Amundi.
"Technically it looks like a buy signal. The big fundamental
caveat that doesn't favour that is China. Everybody knows it has
to slow down. Whether the slowdown is going to be sudden is a
(Additional reporting by Jennifer Ablan and Sam Forgione in New
York and Sujata Rao in London; Editing by Larry King)