Back to the data drawing boards? Buy emerging markets on the dips

The beautiful magnolia trees are blossoming, and we all know what that means. Bluer skies over London, happy dogs in the parks, and speculation picking up on whether we'll see a repeat of the "sell in May" strategy. Last week ended with a thud after a much weaker-than-expected U.S. April jobs report.

As soon as Friday's figures were out, attention turned to whether the U.S. Federal Reserve still could be on course to hike rates in June -- and the impact this would have on the world economy as funds flood back to the better returns of the U.S.

One man who thinks we're missing the point on the Fed's emerging market impact is David Hauner, Eastern Europe, Middle East and Africa (EEMEA) Cross Asset Strategist from Bank of America Merrill Lynch. He says the recent risk-off scenarios raise his conviction of a correction in May. I questioned David on this.

Dhiraj Singh | Bloomberg | Getty Images

Louisa Bojesen: What makes you so sure that we'll see an emerging market correction this month?

David Hauner: First of all, we've been bullish on emerging markets for the last three months as positioning was just way too bearish; we thought the China slowdown concerns were exaggerated, and that the dollar was somewhat overbought.

We're ripe for a correction for a few reasons. First of all, speculators are now long in their short-term positioning of emerging market currencies and equities. Second, speculators are also long oil, and oil is very important for emerging markets. And third, the U.S. Federal Reserve is still on the fence regarding a possible hike in June. And even without taking a strong view of whether they hike in June or not, I think it's fair to say that right now virtually nothing is priced in, so the risk-reward ahead of that is not great.

LB: We all have inflation fever, and monitor it so closely. Your research shows the next EEMEA trade is being long reflation winners…who are the reflation winners?

DH: What we mean by 'reflation' is not any huge improvement globally, but we do think that base effects in the second part of the year will start to push higher, and we have the view that Brent will be above $50 a barrel in the second half of the year, and above $60 a barrel next year. The reflation winners are clearly the oil exporters, commodity exporters and cyclical markets, and higher yielding markets.

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LB: I know a lot of investors who think it's way too early to invest in Russia…you say 'Go long Russia vs South Africa, and go long Russia vs Turkey'. How much upside is there in that trade?

DH: If you look at the chart for the Russian ruble against the South African rand, you still easily have 15 percent to go, and it's a positive carry trade. So there is significant elasticity. Yes, investors have been pulling back because of oil and the tensions following the unrest in Ukraine, but we feel the fundamentals are getting better, the spreads are still very high in local currency debt, and we think investors will overcome their fears and gradually come back.

Even with Hauner's anticipated correction in May, he's quick to say that you should be "buying the dip" as he expects another leg higher in emerging markets in late June. He thinks gross domestic product growth and earnings will continue to improve as central banks still are able to provide additional stimulus given soft inflation. For now, it's back to the data drawing-boards when trying to determine the direction of markets, with a good dose of upcoming election uncertainties thrown in for good measure.

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