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Investors flee emerging markets

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In spite of their potential for stronger long-term growth, investors are turning their back on emerging markets as concerns over Turkey, Argentina and trade tariffs from the US hit markets.

The Lloyds Investor Sentiment Index showed a drop of 5.1 percentage points to 12.9% – the lowest level since 2016. Younger investors (those aged 25-44) have lost the most faith in emerging market investment. In July 2018, it was their preferred asset class, but sentiment has more than halved in the last quarter, from 30% (July) to14% (September). Recent developments in Turkey and Argentina have seen their central banks raise interest rates to 24% and 60% respectively, to curb inflation. Recent performance has been weak, falling 2.9% over the month.

However, Lloyds Private Banking analysis showed that emerging market value stocks are one of the most attractive assets. It added: “We believe valuation is one of the key predictors of long-term returns for asset classes, so differentiating between countries has never been more important.”

The latest sentiment index also showed a slump in investor sentiment towards commercial property, with the asset class recording its lowest level since the EU Referendum in June 2016 (at2%). It has been seeing a steady decline since 2014 and 2015, when it had an annual average sentiment of almost 50%. It has been negatively impacted by Brexit concerns. With the pivotal EU summit due in October, a poor outcome for the UK may further negatively influence investor sentiment.

Overall investor sentiment dipped 2.9%, with UK government bonds the biggest riser and gold the biggest faller. Over the past 12 months, US shares have seen the strongest rise in sentiment, up 13.4%. This has been driven by stronger performance. US stock markets have risen 3.1% over the past 12 months, compared to a fall of 3.5% in UK shares.

Markus Stadlmann, Chief Investment Officer says: “Many emerging market currencies – like Turkey’s Lira – are trading at rock bottom levels. By contrast, investor sentiment has been undermined by US-China trade tensions, and turmoil in Turkey and Argentina. This divergence could be a long-term investment opportunity in the making. The economic resilience and growth potential of more than a handful emerging markets is undiminished. As a result, we’re increasing the amounts we invest in certain countries within emerging markets”.


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