Investors invested billions of dollars in emerging market assets in early 2021 following a late last year banner, showing how the flood of central bank stimulus continues to drive a frantic search for yield.
A cluster of 30 major developing countries drew $ 17 billion in admissions in the first three weeks of January alone, according to a Financial Times analysis of daily data from the Institute of International Finance.
The good start to 2021, with entries largely geared towards equities, comes after a drastic change last year. After a record exodus of nearly $ 90 billion in March at the start of the pandemic, investors returned to EM stock and bond markets in mounting flooding, with nearly $ 180 billion in the fourth quarter, bringing inflows totals for the last nine months of 2020 to over. $ 360 billion, according to a larger IIR data set that tracks 63 emerging economies.
“The hunt for yield is on for sure and will last a long time,” said Robin Brooks, IIR chief economist.
Emerging market equities rose about 9% in 2021 in dollars, overtaking developed markets, which rose 2.7%, according to the MSCI EM and World indices, respectively. Bond prices eased, however, reflecting a soggy start to 2021 for global fixed income markets.
Bank of America’s survey this month of investors with half a trillion dollars in assets under management shows how many fund houses are bullish on the asset class this year.
The bank found that a record 62 percent of fund managers were overweighting emerging market equities in January, allocating more of their capital than the levels of their benchmarks. Two-thirds of fund managers surveyed said EM would be the best performing asset class in 2021.
Growing optimism about emerging markets has been accompanied by growing pessimism about US assets, according to the survey.
However, analysts warned that while economic and trade conditions were favorable for many emerging countries, recent foreign capital inflows had been largely driven by huge stimulus packages from the U.S. Federal Reserve and other central banks during the pandemic, leaving vast reserves of investment capital in pursuit of higher returns than those generally available in developed markets.
Investors were supported by the better than expected performance of many developing economies during the pandemic and by the early arrival of vaccines. Despite high death rates in some countries, especially in Latin America, many others suffered less harshly than expected, putting less strain than expected on health services and strained public finances.
Billions of dollars in liquidity injections from the Fed and other central banks, combined with swap lines from the Fed to several major central banks in emerging countries and swift action in the form of emergency loans from the IMF and World Bank, have so far avoided any systemic situation. debt problems.
Many investors are hoping that emerging countries dependent on exports of raw materials and other goods will benefit from growing demand from China, where the economy grew 2.3% last year while other major economies were contracting, and from the United States, where Joe Biden’s administration is expected to spend heavily on infrastructure and other productive investments.
They also indicate relatively low valuations for some emerging assets.
Goldman Sachs analysts said emerging markets “are expected to remain in favor over the next few months” thanks to their exposure to China and the broader rise in the global economy as well as rising price expectations of raw materials.
The Bank of Wall Street said it had raised its expectations for emerging market currencies, bonds and equities this month after they had all already moved closer to targets in place earlier in the year.
However, David Hauner, EM strategist and economist at BofA Securities, said the start of 2021 was more difficult than expected for emerging bonds due to rising US interest rates and a stronger-than-expected dollar. .
Both developments can be bad for emerging assets, as rising U.S. yields make investors less willing to buy riskier assets elsewhere, and a stronger dollar creates problems for emerging governments and companies that have borrowed from it. foreign by issuing bonds denominated in dollars.
“Most emerging markets are fundamentally strong enough to cope with a moderate rate hike,” he wrote in a report Jan. 14. “Still, emerging market fixed income returns this year are likely to be moderate.
Philip Turner, a guest lecturer at the University of Basel and a former senior official at the Bank for International Settlements, said companies in emerging markets were able to borrow easily during the crisis thanks to actions by the Fed and others, including central EM efforts. banks to ensure the proper functioning of local financial markets.
But while corporate and country-level governance has improved in many cases, he said portfolio flows to emerging markets have been driven primarily by global liquidity and carry the risk of instability. .
“Interest rates have been low for a very long time and we have no previous experience of this,” he said. “There is a lot of interest rate risk in the world. We have never done a stress test and it is very difficult to know what will happen when conditions change.