In a report, called EmMa top or flop? The bank reviews the performance of emerging market equities since the beginning of the year. It says some equities investments are more attractive than at any time over the last two years but argues investor should await more positive news before pulling the trigger.

Emerging market equities have lagged other regions by up to 20 per cent since January, dragged by concerns about the deceleration of the China economy, among other facdtors.

“The valuation to equity markets such as the US or euroland has reached levels last seen during the 2008/9 financial crisis and fund managers have rarely underweighted EmMa equities so strongly as in recent months. Only when the dot-com bubble burst in 2001 and during the financial crisis of 2008 have levels been this low. This means a lot of bad news is priced in. From a contrarian perspective, such negative sentiment is positive since it may take a slight improvement in sentiment to drive a strong upswing,” the Swiss bank says.

“We are closely monitoring emerging market equities. We await further improvements in economic data before turning bullish. But if the rising trend in indicators continues, we believe the fourth quarter could signal a change to overweight equities,” Gabriel Bartholdi, Strategist, J Safra Sarasin, said in the report.

Two groups

The bank said investors must distinguish between two emerging market equity groups. The first, which includes China and the other Asian economies (except Indonesia and India) and many Eastern European emerging markets, can use fiscal and monetary policies to slow growth. The second, which includes Brazil, Turkey, India and Indonesia, have high rates of inflation and are in no position to take monetary policy measures.

“J Safra Sarasin sees some equities recovery potential in the first group, but takes a cautious stance to investing in the second in the near term,” it said.