Larger investors defying EM outflows by flooding emerging markets with cash

According to a seasoned Bank of America economist who spoke with Reuters, large investors are starting to devote more capital to emerging economies as they seek returns. This could signal a structural change in the way they manage their wealth.

According to David Hauner, president of Bank of America’s global emerging markets fixed income strategy, large global fixed income funds—which possess greater clout than those devoted to developing markets—are making “huge sizes” commitments in strategic locations.

The funds are going to nations like Mexico, Brazil, Turkey, India, and Poland that have impressive growth or reform narratives. In Egypt and Nigeria, short-term wagers have also gained popularity.

Hauner stated, “I think that is the beginning of a structural story,” and added that investors preferred country-specific exposures to index products that aggregate a variety of emerging market assets.

“You’re witnessing withdrawals from committed investors and crossover participants at the same time. That’s what’s novel. This is the first time that I can remember it happening.”

The flows imply that, in an attempt to support state finances, investors are rewarding some nations when they enact difficult measures for their citizens, such devaluing their currencies and cutting subsidies.

Furthermore, they contradict highly monitored data from EPFR, which indicates that, excluding China, emerging market debt funds have withdrew almost $5 billion this year.

According to Hauner, no one data point could adequately represent the investments. Exchange-traded and mutual funds including a predetermined blend of emerging markets, frequently led by China, are included in the EPFR statistics.

However, as fortunes divide among developing nations, with China, for instance, trailing in returns and other traditionally riskier nations, like Egypt, surging following an infusion of funds from the United Arab Emirates and the International Monetary Fund, more investors wish to allocate their capital to specific emerging markets as opposed to using a fund that has a predetermined asset mix.

According to Alejandro Arevalo, head of emerging market debt at Jupiter Asset Management, economies like Vietnam, India, and Mexico have become “darlings of investors” due to their surprisingly excellent performance.

He stated, “Money has been flowing in into these countries,” noting that they have done a good job controlling inflation and setting themselves up to profit from trade tensions between China and the United States.

He predicted that conventional flows will soon change to reflect the change.
According to Hauner, there are already “puzzle pieces” showing the present cash flows, such as estimates from the Institute of International Finance that depend on balance of payment information.

According to IIF data, for instance, investors increased their holdings in emerging economies by roughly $32.7 billion in March, marking the fifth consecutive month of net foreign inflows into these markets overall.

The perception of inflows is further supported by the year-over-year increase in high-yield bonds from Egypt to Pakistan and the market’s assimilation of billions of bonds issued from Turkey to Ivory Coast.

“It just reflects that EMs (are) growing up and that global debt investors want to have a fair share of exposure,” Hauner stated. “Compared to before, they are more stable. However, they are providing yields that are rather appealing.”