Time to get bullish on emerging markets, says Bank of America ML

It’s “time to get out of the bunker and off the fence” as far as Asian and emerging-market stocks are concerned, according to Bank of America Merrill Lynch, which has ended its five-year bearish stance.

The bank made a tactically bullish call at end-February, but now reckons investors should make a longer-term bullish commitment to both Asia ex-Japan and EM equities.

“We are at an inflection point that is likely to challenge the winners of the past five years and boost the losers. Growth/defensive sectors - the Staples, Healthcare,Utilities, Telecoms, Internet/software sub-sectors have outperformed cyclicals by 35% in EMs since 2011 as the USD strengthened and inflation fell. We think it is time to reverse this stance.”

Bank of America cited seven reasons for its new, structural bullishness, which included attractive valuations and more competitive Asia/EM currencies.

“About 40% of these 23 markets have currencies in their most competitive quartile, potentially boosting EBIT margins. Collectively, this breadth of competitiveness for EMs doesn't get much better than this, in our view.”

Merrill also said the miserable run of Asian/EM earnings per share growth revisions was likely ending and that China’s monetary policy – a key driver of Asia/EM equities – was gaining traction.

“Monetary policy in China is working exactly as it should - by boosting property prices (a $22tn market, accounting for 57% of Chinese household wealth). Imposing negative real deposit rates of -0.8% on China's savers to financially repress them makes sense given China's 250% non-financial sector debt to GDP. Don't fight this.”