For all their recommendations to buy emerging-market stocks, the world's largest money-management firms haven't convinced some investors that the worst start to a year since 2009 is over.
Developing-nation exchange-traded funds in the U.S. had about $100 million of outflows since the MSCI Emerging Markets Index reached this year's low on Feb. 5, while foreigners pulled $892 million from bourses in South Korea, India and Brazil, data compiled by Bloomberg show. BlackRock Inc.'s Larry Fink and Templeton Asset Management's Mark Mobius are among managers of more than $7.7 trillion who say shares are cheap after the rout.
While emerging-market equities trade at the biggest valuation discount versus advanced-nation stocks since 2006, investors are concerned that slowing economic growth and reduced Federal Reserve stimulus will lead to more losses, according to Asian Capital Holdings Ltd. The MSCI index's forward price-to- earnings ratio is still 14% higher than when shares bottomed after their last bear market in 2011.
“The big boys are bullish but people see that as lip service,” Ronald Wan, the chief adviser for China at Asian Capital, which oversees about $100 million, said Thursday. “Investors are scared.”
The emerging-market gauge tumbled 8.6 percent this year through its low on Feb. 5 as developing-nation stock funds tracked by EPFR Global and Morgan Stanley recorded more than $15 billion of withdrawals. Shares sank as Chinese manufacturing indexes dropped, central banks from India to Turkey raised interest rates to support their currencies and the Fed pushed ahead with plans to reduce monetary stimulus.
U.S.-listed ETFs invested in emerging markets recorded $69 million of net outflows in the five-day period ended Feb. 11, while those focused on the BRIC countries of Brazil, Russia, India and China had $30 million of withdrawals, data compiled by Bloomberg show. The funds have had combined outflows of $10.6 billion so far this year.
Foreign investors have pulled $318 million from South Korean stocks since the emerging-market index reached its low, while Indian shares lost $130 million. Brazil had $443 million of outflows, versus $252 million in Thailand and $2.4 billion in Taiwan.
Mr. Fink, whose firm is the world's largest money manager with $4.3 trillion, said developing-nation equities are attractive because of low valuations relative to the countries' potential growth rates. He spoke in an interview with Charlie Rose that aired on PBS on Feb. 11. Mr. Mobius, who oversees more than $50 billion, said on Bloomberg Radio the same day that the selloff is approaching its end.
Virginie Maisonneuve, who helps oversee about $1.9 trillion as a deputy chief investment officer at Pacific Investment Management Co., told Bloomberg TV on Feb. 6 that investors should be “courageous” and look for buying opportunities among emerging-market consumer companies. Geoff Lewis, a global market strategist at JPMorgan Asset Management, said Wednesday that long- term investors should be looking to purchase now. His firm manages about $1.5 trillion.
Executives at some of the world's biggest banks have also expressed optimism toward developing countries.
Lloyd C. Blankfein, chief executive of the Goldman Sachs Group Inc., said in a Bloomberg TV interview Feb. 11 that emerging markets can withstand an investor retreat better than in 1998, when currency turmoil prompted international bailouts. UBS AG CEO Sergio Ermotti said in a Feb. 4 interview that this year's selloff looks overdone.
Some emerging markets have lured back investors. Indonesia attracted $235 million of equity inflows in the past six days amid data showing faster-than-estimated economic growth and speculation that the country's current-account deficit will narrow. South African shares lured $222 million as the rand rallied from the weakest level since 2008.
“We are nearing the point where people are beginning to say, 'Hey, it looks pretty good now in terms of valuations,'” Mr. Mobius said. “We are probably nearing the end of this big rush out of emerging markets.”
Hans Goetti, the chief investment officer for Asia at Finaport Investment Intelligence, said he has an underweight position in emerging markets because there are better buying opportunities in developed nations.
U.S. economic growth has picked up and there's a “broad improvement” in the labor market of the world's biggest economy, Federal Reserve Chairman Janet Yellen told lawmakers Feb. 11. The Standard & Poor's 500 Index has climbed 20% during the past 12 months and the Stoxx Europe 600 Index gained 15%, versus a 11 percent retreat in the MSCI emerging- market gauge.
China's official manufacturing index for January dropped to a six-month low of 50.5 as output and orders slowed amid government efforts to rein in excessive credit. A separate PMI report compiled by HSBC Holdings PLC signaled the first contraction in six months.
Developing countries face “falling growth rates and normalization of monetary policies in U.S.,” said Mr. Goetti, whose firm oversees about $1.5 billion. “We are not seeing a disaster, just that on a relative basis they will underperform.”
Investors aren't willing to place large wagers on developing nations after getting whipsawed this year, according to Wellian Wiranto, an economist at Oversea-Chinese Banking Corp.
A reading of 10-day volatility in the MSCI emerging-markets index has more than tripled since the end of December as currency devaluations in Argentina and Kazakhstan combined with political turmoil in Turkey and Thailand to rattle markets.
“There's a lot of uncertainties still in the air, concern other emerging countries may throw a spanner into the works,” said Mr. Wiranto. “That keeps people from making big bets.”