There’s been no shortage of love for emerging markets (EM) since the 2009 rebound, but Morgan Stanley believes emerging market funds have been caught under-invested in the EM space:
Morgan Stanley’s Rashique Rahman:
Our EMEI – which measures EM dedicated investor exposure to their benchmarks – remains in under invested territory, even as it has gone up in recent days. Further corroborating this, we estimate well-above average cash balances on the part of EM real money investors.
Both these factors suggest a still-strong market technical backdrop – likely to not only limit the near-term downside for EM risk markets, but also to propel them higher as short- term market momentum conditions and valuations improve.
Perhaps their fund flows came in faster than they could deploy the new capital, which is supportive for the emerging markets they’ll likely need to allocate money to.
Seasonality also favours continued strength for the emerging markets, says MS:
We are also entering the seasonally strong period, 4Q and 1Q the year following, typically characterised by strong fund inflows on the back of new money mandates to EM.
(Via Morgan Stanley, Global EM Investor, 26 October 2010)