Investors deposited billions of dollars in emerging market assets in early 2021, following a flag late last year, showing how the flow of stimulus from the central bank continues to spur a frantic hunt for returns.
A group of 30 large developing countries brought in $ 17 billion in inflows in the first three weeks of January alone, according to a The Washington City Times analysis of daily data from the Institute of International Finance.
The strong start to 2021, with inflows largely focused on equities, comes after a dramatic shift last year. After a record exodus of nearly $ 90 billion in March at the start of the pandemic, investors returned to emerging market equity and bond markets in a rising flood, with nearly $ 180 billion in the fourth quarter, pushing total inflows into the emerging markets. last nine months of 2020 to more than $ 360 billion, according to a broader IIF dataset that tracks 63 emerging economies.
“The hunt for yield is certainly ongoing and will take a long time,” said Robin Brooks, IIF chief economist.
Emerging markets stocks are up about 9 percent in dollars in 2021, outpacing developed markets, which are up 2.7 percent, respectively, according to the MSCI EM and World indices. However, bond prices have softened as a result of a boggy start to 2021 for global fixed income markets.
This month’s Bank of America survey of investors with half a trillion dollars in assets under management illustrates how many fund houses are optimistic about the asset class this year.
The bank found that a record 62 percent of fund managers were overweight emerging market equities in January, allocating more of their capital than the levels in their reference indices. Two-thirds of fund managers surveyed said emerging markets would be the best-performing asset class of 2021.
Rising optimism about emerging markets has been accompanied by growing pessimism about US assets, the survey found.
However, analysts warned that while economic and business conditions were favorable for many emerging markets, the recent inflow of foreign capital was largely driven by massive stimulus programs from the U.S. Federal Reserve and other central banks during the pandemic, pushing huge amounts of investment capital in search. towards higher returns than are typically available in developed markets.
Investors were supported by the better-than-expected performance of many emerging economies during the pandemic and the early advent of vaccines. Despite the high death rates in some countries, especially Latin America, many others have suffered less acutely than expected, putting less pressure on health services than feared and on public finances.
Trillions of dollars in liquidity injections from the Fed and other central banks, combined with swap lines from the Fed to several major emerging market central banks and swift action in the form of emergency loans from the IMF and the World Bank, have avoided all systemic problems so far . debt problems.
Many investors hope that emerging markets that rely on exports of commodities and other goods will benefit from rising demand from China, where the economy grew 2.3 percent last year as other major economies contract, and from the US, where the government Joe Biden is expected to spend heavily. infrastructure and other productive investments.
They also indicate relatively low valuations for some emerging assets.
Analysts at Goldman Sachs said emerging markets “should remain in favor in the coming months” due to their exposure to China and the broader upturn in the global economy, as well as expectations for rising commodity prices.
The Wall Street bank said it raised its expectations for emerging currencies, bonds and equities this month, after all had already shifted towards targets in place at the start of the year.
However, David Hauner, EM strategist and economist at BofA Securities, said the early 2021 was more difficult than expected for EM bonds due to rising US interest rates and a stronger-than-expected dollar.
Both developments could be bad for emerging assets, as rising US yields make investors less willing to buy riskier assets elsewhere, and a stronger dollar creates problems for emerging governments and companies that have borrowed abroad by issuing dollar-denominated bonds .
“Most emerging markets are fundamentally solid enough to cope with moderately rising interest rates,” he wrote in a report on Jan. 14. “Yet emerging market fixed income returns are likely to be only moderate this year.”
Philip Turner, a visiting lecturer at the University of Basel and a former senior official at the Bank for International Settlements, said emerging market companies could easily borrow during the crisis thanks to the actions of the Fed and others, including the efforts of central emerging markets. banks to keep the local financial markets running smoothly.
But while corporate and national governance had improved in many cases, he said portfolio flows into emerging markets were mainly driven by global liquidity and created the risk of instability.
“Interest rates have been low for a long time and we have no previous experience of that,” he said. “There is a lot of interest rate risk in the world. We’ve never had a stress test and it’s very difficult to know what will happen when conditions change. “