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The world’s largest asset manager has downgraded its outlook on emerging markets, including South Africa, choosing to be more neutral than bullish on developing economies’ equity markets.

BlackRock, which held its midyear outlook on Wednesday, also downgraded emerging market debt and currencies from overweight to neutral.

“We’re downgrading emerging market equities across the board from overweight to neutral, and that includes China, and that includes South Africa,” said Li Wei, MD and global chief investment strategist at the BlackRock Investment Institute.

Li said while emerging markets are currently enjoying tailwinds like commodity prices boom, those are being finely balanced by headwinds like the heightened US dollar volatility. The asset manager also expects a monetary tightening cycle in the emerging markets as many struggle with runaway inflation.

The Covid-19 and Delta effect

She said there is also a “bigger question mark” about the depth of structural scars that Covid-19 has left behind in these markets.

“Specifically in the context of South Africa, we don’t have a country coverage view. But the comments that I made apply to South Africa as well in terms of the direction of policy. The next move seems to be more towards tightening potentially.

“Also, if you think about the degree of the lockdown, it’s moving in a direction the opposite of what we’re experiencing in the developed world,” said Li.

But at least for now, BlackRock has only chosen to be neutral on emerging markets. It could have chosen to be underweight in its outlook, a move that could drive some investors out of emerging economies’ stock markets.

Li said BlackRock did not expect to downgrade emerging markets to underweight. But it will be looking closely at how the Covid-19 Delta variant affects different emerging markets. She said in the developed markets, the variant has not translated into a rapid rise in new infections and hospitalisation rates.

“But in emerging markets where the vaccination rate is further behind, this is something that we are going to very, very closely, watch out for.

“Also, any overreaction to future taper discussions can have ripple effects to emerging markets,” said Li.

On the other hand, BlackRock said it is starting to see growth in developed markets like Europe and Japan accelerate and catch up with the US. 

So, it has upgraded European equities to overweight and upgrade Japanese stocks from underweight to neutral.

Jean Boivin, the head of BlackRock Investment Institute, said because what the world is currently going through is not a business cycle dynamic, markets not undergoing a recovery, but a complete restart.

So, the growth acceleration the investment house been observing in these developed markets is quick, and it’s broadening.

“The US and the UK are already kind of ahead of that curve. China was, even last year, showing what the next stage could look like,” said Boivin.

That said, he cautioned against extrapolating too much from the numbers that are coming out of economic data right now. — News24.com.