Emerging Markets

Momentum shifts from Europe to EM equities


Emerging market (EM) stocks touched a new three-year high on Wednesday as uncertainty over ECB stimulus measures prompts investors to switch out of Europe in favor of EM equities.

The MSCI emerging equities index gained 0.3 percent, extending gains made earlier in the week to reach a new three-year high, fueled by a rise in external demand, analysts have said.

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The boost in EM equities has been bolstered by an asset allocation shift away from Europe, following five months of emerging market outperformance versus their developed market counterparts as sentiment and fundamentals in the region improve.

"Emerging market equities, still on a relative basis are cheap compared to developed market equities and secondly they are still underowned. While we are seeing flows go in, I still think particularly from European investors we can see more money going in to reallocate to EM equities," chief investment strategist at iShares EMEA, Stephen Cohen said.

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EM equities have outperformed developed markets since mid-March, and are up some 9 percent so far this year, while the euro zone has seen a deterioration of economic data in recent weeks, with the region's growth stagnating in the second quarter of the year.

"Despite these gains, we think there could be more to go in the EM trade," Cohen added.

Chief strategist at Pictet Asset Management, Luca Paolini said economic momentum looks to be shifting in favor of emerging markets as equities there are attractively valued at a 25 percent discount to developed market stocks.

Pictet has upped its exposure to China on valuation grounds and to India following the strength of the new government's reform agenda, Paolini said.

"The euro zone economy remains fragile. Leading indicators are now in negative territory as growth momentum is slowing down, credit growth remains subdued and deflationary risks are still present. U.S. equities exhibit strong fundamentals but look fully valued and overbought," he said.

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Chinese banks

China is another main play of emerging markets portfolio manager at Ashmore, Julie Dickson, particularly Chinese banks which she said are offering investors very good value for money at the moment.

"China is one of our biggest bullish bets that we have in our portfolio, it is a market that is extremely deep and broad. I think investors have been quite quick to sell it off the moment there is a sell-off in the U.S," she told CNBC.

"There is a number of banks out there that are very well run, have good quality balance sheets – have seen their lending rise in small businesses. So we are very excited about some of the things we are seeing and because the market is so depressed in that area, there is so much fear around financials in general – they are great buying opportunities," she added.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave