Emerging market funds continue to attract inflows after tough 2018
Analysts say that China’s approach to trade and its domestic economy will be the most important factors in a sustained recovery for emerging markets
Investors are tiptoeing back into emerging markets equities, hoping to ride a string of recent gains after a bruising year dominated by political crises.
EM funds attracted $3.3bn for the week ending Thursday, according to EPFR Global data, extending the run of inflows for the asset class to 14 weeks.
This brings the total flows to the asset class over the past three months to $27.5bn, reversing periods of acute outflows seen throughout the year, although a strong start to 2018 meant overall flows for the full year exceed $27.8bn.
A currency crisis in Turkey that sent the lira plummeting, Argentina’s request for a $50bn bailout from the International Monetary Fund and a recession in South Africa dragged the MSCI Emerging Markets index to a 14.58 per cent loss for the year. The index has since bounced 8 per cent since its October low.
There are more emerging markets countries growing at 3 per cent or more than among the developed markets
Matthew Benkendorf, chief investment officer of Vontobel Asset Management, said EMs are attractive due to the combination of their own lacklustre performance in recent years and uncertainty in developed markets such as the US.
“Emerging markets have been relatively cheaper,” he said. “Typically, people pull money back from emerging markets during times of uncertainty, but the long-term growth in emerging markets is attractive.”
Expectations the Federal Reserve will slow US interest rate increases will also make EMs more attractive. Higher interest rates in developed markets typically render the yields offered by apparently riskier EMs less attractive.
Cameron Brandt, director of research for EPFR Global, said the turmoil facing developed markets, notably with the Brexit process in the UK and market anxiety over economic policy in Italy, have made EMs more compelling.
“There’s value there. It was heavily sold off with a lot of bad news to price in,” he said.
EM bonds have also benefited from the change in sentiment. EM bond funds drew $2.4bn for the week ending Thursday, the largest weekly figure since late January last year, according to EPFR Global figures.
A cautious Fed, proactive policy from China to support a slowing domestic economy and the US-China trade stand-off “are turning more favourable for the riskier spectrum of EM asset classes”, Oxford Economics stated in a Wednesday research note.
China’s approach to trade and its domestic economy will be the most important factors in a sustained recovery for EMs, the analysts wrote. “We see positive signs on this front.”
Mr Brandt said fiscal profiles in emerging markets are often better than many developed markets. “There are more emerging markets countries growing at 3 per cent or more than among the developed markets.”