Emerging markets stocks and bonds, which held such promise months ago, are in retreat. And that could be bad news for advisers.
Indeed, more than half the advisers surveyed by InvestmentNews at the beginning of the year said they planned to increase their allocation to emerging market stocks. No other equity asset class was cited as often. About a third of the polled advisers said they planned to increase allocations to emerging market bonds, the most of any fixed-income asset class.
Such bets have turned sour in the past month, however, as a strong U.S. dollar, rising interest rates, and a continued slowdown in China have taken a heavy toll on emerging market securities.
The MSCI Emerging Markets Index, the bellwether benchmark for emerging market stocks, has fallen more than 7% over the 30-day period ending June 10. The S&P 500 is up close to 1% over the same time period.
“This looks to us like a potential bearish pattern,” said Jordan Kohley, market analyst at Lowry Global. “This is showing a degree of deterioration that would indicate a lot of negativity.”
Emerging market bonds have been hit just as hard. The average emerging markets bond fund lost more than 6% over last month, according to Morningstar Inc., making it the worst performing fixed-income asset class over that time.
Strategists don't seem to be too optimistic about a turnaround happening any time soon. “Emerging market credit is our least favorite sector because of everything going on with the dollar,” Christine Hurtsellers, CIO of ING Investment Management, said at a press conference in New York City Tuesday morning.
Michael Kresh, managing member at Creative Wealth Management LLC, doesn't plan to cut back on his allocation to both emerging markets stocks and bonds, but he is watching the situation closely — for buying opportunities.
“I'm more concerned about using short term fear to create investment opportunities," he said, "than I am about short term returns being projected into the future."
(Jason Kephart contributed to this article)