Strong inflows reverse emerging-markets exodus

Profit from developed-nation positions is finding its way across global economy

Apr 8, 2014 @ 4:04 pm

By Carl O'Donnell

Emerging markets exchange-traded funds have enjoyed a turnaround of sorts, with big inflows in the last few weeks on the heels of a rough first quarter.

Those inflows are being driven by bright spots in developing economies, which are attracting investors taking profits from their developed-markets positions.

Emerging-markets ETFs suffered more than $41 billion in outflows in the first quarter after the Federal Reserve began to wind down its quantitative-easing program. But since the end of March, more than $4 billion has gone into two ETFs that track emerging-markets equities indexes, according to data from EPFR Global.

The biggest gainers were iShares MSCI Emerging Markets (EEM), at around $4 billion in inflows, and Vanguard FTSE Emerging Markets (VWO), at about $324 million, according to data from ETF.com.

“This seems to be a turning point for emerging-markets flows,” said Dave Nadig, chief investment officer at ETF.com. While the uninterrupted stream of outflows from emerging markets funds may be finished, “no one is expecting these funds to shoot to the moon.”

A number of developments in key emerging-markets economies are contributing to renewed investor optimism, said Paul Christopher, chief international strategist for Wells Fargo Advisors.

For example, China recently announced a stimulus package that could help maintain the country's 7.5% annual growth target. In addition, there is some enthusiasm among investors about elections in India and Indonesia, which both are poised to put reform-minded candidates into office, he said.

Another potential driver could be that investors are trying to lock in profits gained during developing economies' strong bull market in 2013, said Patricia Oey, a senior fund analyst with Morningstar Inc.

“Generally speaking, during the period of double-digit gains in 2013, if you cared about asset allocations you could be overweight in developed markets and underweight in emerging markets,” she said. “Now that developed markets' gains have slowed, investors might be increasing allocations to emerging markets.”

Mr. Nadig expects to see some near-term volatility in emerging-markets fund flows as investors “struggle to understand the relationship between emerging markets and developed markets.”

Over the long term, emerging markets should experience faster growth than developed markets due to favorable demographics and rapid industrialization, Ms. Oey said. However, investors shouldn't be too quick to give up on developed markets in favor of emerging economies.

“We think that developed markets have further upside and emerging markets have more room to underperform this year into next,” Mr. Christopher said.

With the exception of China, most emerging economies are hesitant to undertake needed reforms, Mr. Christopher added. This includes India and Indonesia, whose reformist candidates — if they are elected — may have a hard time driving change.

In addition, there is a good probability that a strengthening U.S. dollar, driven by rising rates and strong U.S. growth, could cut into near-term gains from emerging markets, Mr. Nadig said. He recommends that investors who want to up allocation to emerging markets consider currency-hedged ETFs, such as the db X-trackers MSCI Emerging Markets Hedged Equity Fund (DBEM).

“Currencies in emerging markets are very volatile. The slightest political hiccup can send currencies plunging,” he said. “This is something not enough investors are cognizant of.”

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Gadget Girl

Orion's Clarke: Why integration is paramount for RIAs right now

Orion has tapped into a huge demand for customizable, integrated solutions that let advisers spend more time building their business. Hear from Eric Clarke and two of Orion's integrated partners to get their thoughts.

Latest news & opinion

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

PIABA accuses Finra of conflicts of interest

Public Investors Arbitration Bar Association report slams self-regulator over its picks for board of governors.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print