Investors have been looking at emerging market (EM) equities again, an asset class in which we believe many professional investors had been underweight for some time.
Changes in fundamentals have led to inflows.
The U.S. Federal Reserve (Fed)’s policy has definitely been supportive of equities. This has resulted in a weaker U.S. dollar, which is seen as positive for EM economies in that it boosts U.S. exports and is therefore good for EM countries that sell commodities. It also reduces the value of EM countries’ dollar-denominated debt. Meanwhile, China’s recently revised GDP forecast of 6.5% for 2016 (China’s National People’s Congress, 27/02/16) is seen as more realistic while fears of a ‘hard-landing’ there have subsided.
First from U.S. investors and now from Europe too.
We have now seen evidence that both are seeing investor repositioning from under-owned levels at least in Exchange-Traded Products and Exchange-Traded Funds (ETFs) are the largest category of such products.
EM equity ETFs saw the biggest single day inflows for well over a year on 17/03/16 – the day after the Fed’s dovish message (Bloomberg, 2016). March finished with flows in excess of US$9.0 billion with U.S.-domiciled investors having led the trend and European-based investors now joining in (BlackRock, global-domiciled exchange-traded products at 31/03/16).
What next and where to go?
The U.S. economy now appears to be unlikely to fall straight back into recession although the Fed did revise down its economic projections slightly, with 2016 GDP now forecast for 2.2% versus a forecast of 2.4% last December. However, core inflation and the rate of unemployment remained unchanged (year-on-year, source U.S. Federal Reserve, 16/03/16). In the longer term however, revising rate path expectations to meet market pricing could prolong policy uncertainty which we believe could be a source of further market volatility. We believe that minimum volatility strategies in broad EM equities may be opportune for investors looking to bring up their portfolios' strategic underweight exposure to EM to more neutral levels.
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