The February Merrill Lynch global fund manager survey reports that a net 43% of respondents are overweight emerging market equities, the highest proportion for 12 months. The degree of enthusiasm is surprising because emerging equities have failed to deliver in recent years: the ratio of MSCI emerging and developed market indices is currently 17% below a peak reached in September 2010* – see first chart.

Less favourable liquidity conditions have contributed to this underperformance. The price relative peaked as the gap between E7 and G7 real six-month narrow money expansion narrowed sharply, turning negative in early 2011 – second chart. The glory days of emerging equities in 2009-10 and before the financial crisis, by contrast, occurred against the backdrop of relative monetary buoyancy.

The real money growth gap remains negative but has narrowed recently, raising the possibility of a “buy signal” for emerging equities later in 2013. A better January E7 number, however, is mainly due to China, where the late timing of the New Year holiday may have imparted a temporary boost – see previous post. Monetary trends remain soft in other large emerging economies – third chart.

With overseas investors already overweight, better relative performance of emerging equities may depend on a pick-up in domestic buying, in turn suggesting awaiting more convincing evidence of an improving monetary backdrop before adding to exposure.

*Based on month-end data and yesterday’s close.