- Article
- Global Investment Research
- Emerging markets
HSBC Emerging Markets Sentiment Survey – High conviction, higher caution
HSBC’s 23rd EM Sentiment Survey explores how geopolitical developments have affected investor sentiment towards emerging market assets
Emerging markets (EM) investors are holding the line, even as geopolitics has added a fresh layer of uncertainty to the outlook.
Our latest HSBC EM Sentiment survey shows further improvement in positive expectations since our last survey, as 68% of respondents are now bullish on EM over the next three months, up from 63% in December, while bearish views were nil for the second consecutive survey. This lifts net sentiment to a record 68% (from 63%), the highest in the survey’s history and the 14th straight survey with a positive net reading.
Behaviour is, however, more cautious than the headline optimism suggests. Despite the bullish tone, the overweight positioning has moderated across most EM asset classes and cash holdings have picked up, likely reflecting the impact from the Middle East conflict.
Conducted by Survation between 28 January and 13 March, the survey captures the views of 102 investors from 102 institutions representing USD444bn of EM assets under management. The fieldwork partially overlapped with the recent escalation in Middle East tensions.
The sharpest shift is in EM local currency debt: overweight positions nearly halved to 19% (from 37%), while underweights jumped to 40% (from 0%), taking net positioning down to -21% (from +37%). Net positioning also deteriorated for external debt, to 48% from 73%, as 20% of respondents report being underweight. EM equities were the exception, with net positioning edging up to 57% (from 54%) as underweights fell to 0%.
Cash holdings rose to 4.7% of assets under management (from 4%), with a larger share holding more than 5% cash (43% vs 34%). Still, the intent to deploy has increased: 34% plan to reduce cash (vs 19% previously), consistent with a ‘buy the dip’ mindset rather than a structural de-risking.
Risk appetite
The weighted average risk score rose to 6.9 (from 6.5), its joint second-highest reading, and investors remain confident in EM’s medium-term story: nearly a quarter expect significant EM outperformance versus developed markets (DM) over three to five years, and 61% expect moderate outperformance.
On risks, the survey shows a clear pivot. Geopolitics is now the top downside concern, cited by 37% of respondents (up from 17%), followed by a stronger US dollar at 22% (from 16%). ‘Higher for longer’ US Federal Reserve policy rates remain on the radar (11%), and fewer investors now expect US/developed market rate cuts over the next 12 months (36%, down from 61%).
On the upside, reallocation of capital out of the US remains the top catalyst (29%, down from 38%), but upside risks have broadened to include easing geopolitical tensions (23%), developed market rate cuts (19%), and a stronger rebound in mainland China (19%, up from 12%).
Strategy
In terms of strategy, regional preferences have rotated. Latin America now stands out as the only region with positive net sentiment across all asset classes, with a notable improvement in fixed income sentiment. By contrast, the Middle East saw a marked deterioration across most asset classes. Asia remains the most favoured region for equities and FX.
EM FX sentiment remains positive but softer (net 42% vs 57% previously), while on the fixed income side the preference is for local currency debt (47%), though external debt (34%) has also made a comeback. EM equities sentiment improved further: 67% expect EM equities to move higher over the next three months (from 54%) and a record 78% expect EM equities to outperform DM (from 50%), with no respondents expecting underperformance.
Sustainability
Embedding sustainability into the investment decision-making process is increasing at the top end. However, our survey finds that lack of funding is the largest obstacle to achieving net-zero and developments are needed across government support to drive transition in EM.
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