Pictet Asset Management, which recently moved to a bullish stance on equities, set out its optimistic views on emerging market stocks, an asset class that has caught a chill in countries such as India.

Pictet Asset Management, the firm with €110 billion ($148 billion) of client assets that recently moved to a bullish stance on equities, set out its optimistic views on emerging market stocks, an asset class that has caught a chill in countries such as India.

The firm, part of Swiss-headquartered Pictet, moved earlier this month to take an overweight stance on global equities, having previously been neutral. News that that the US Federal Reserve had paused any “tapering” of quantitative easing – for a while - encouraged PAM to take a more bullish line.

As far as emerging market equities were concerned, PAM also upgraded them to “overweight”, taking the same line with Japanese equities.

“We are optimistic on risk assets in general,” Luca Paolini, chief strategist, told journalists at a briefing yesterday.

Emerging market equities, such as those of Brazil, Russia, India and China, have been hit by the idea that as the US Fed scales down, or “tapers”, bond purchases as part of its loose monetary policy, this will squeeze such markets that have benefited from an investor hunt for yield. As the dollar rises, and US economic fortunes improve, it is argued, this will hit emerging markets. Already, some markets are suffering: the India rupee is down more than 2.5 per cent in its deviation from an equilibrium level against the dollar (source: Pictet); the Philippines peso is down around 1.8 per cent, and the Chinese yuan, is almost down 1.0 per cent on that basis.

Pictet Asset Management is confident for the longer term, despite recent volatility, however. The firm expects emerging Asia equities to deliver returns of 13.5 per cent per annum (in dollar terms) for the next five years, while emerging equities (all regions) will clock up returns of 12.4 per cent p.a. (dollar terms). By contrast, US equities will eke out annual returns of just 2.9 per cent, and eurozone equities will manage just 3.4 per cent.

One of the recent issues to have confronted investors, Pictet pointed out, is that investors hoping that emerging markets could offer true diversity, and low correlation with other markets, have been confounded.

“When there is a crisis and a fall in risk appetite, there is almost no place to hide for investors,” Paolini said.

In Indonesia, for instance, there is a five-year average correlation of domestic stocks, government bonds and currencies, of over 0.6, more than 0.5 on Turkey, Pictet data showed.

Emerging markets, like some developed markets, demonstrated a varied sensitivity to patterns of global growth, depending on how large a share of domestic gross domestic product is influenced by exports and imports. The US, for example, is overwhelmingly a domestically-driven economy, in terms of such “open-ness”, and has a fairly low sensitivity to world GDP growth, whereas Malaysia, which is a relatively open economy, also has a high sensitivity.