Emerging Markets: Flows into bond markets at highest in 19 weeks - Natixis

Lysu Paez Cortez, Research Analyst at Natixis, notes that the emerging markets are proving resilient and are continuing to perform well in the opening months of 2017.

Key Quotes

“Considering the growth outlook for emerging economies has not really come in for an upward revision, that political uncertainties loom menacingly on both sides of the Atlantic and that interest rates are expected to rise in developed countries this year (with the Federal Reserve expected to kick start the process in June), the resilience of emerging markets could be explained by the improvement in sentiment regarding global growth, the most recent data as regards growth and industrial activity (i.e. the PMI) having proved better than expected. Although macroeconomic indicators are more positive in developed countries, the economic fundamentals of emerging countries have also improved slightly since the start of the year.”

“Emerging equity markets and exchange rates on the up

• After the sharp selloff triggered by Donald Trump’s victory in the US presidential election last November, the MSCI EM index has risen sharply since 26 December 2016. With a gain of 9.5% year-to-date, the index is back at 940 points, which corresponds to its levels of mid-2015. 
• The stabilisation of crude oil prices (agreement by OPEC and non-OPEC producers to curb the supply of crude seems to be taking hold) and the rebound in the price of other commodities are also positive factors for a number of emerging countries. 
• Also, emerging currencies have continued to appreciate against the US dollar, retracing their losses at the end of 2016. The Russian ruble, Brazilian real and South African rand have spearheaded this recovery, with gains of 7%, 6.3% and 6.2%, respectively. The one currency to have bucked this trend is the Turkish lira, which is down 4% year-to-date.  

“Flows into emerging bond markets have surged to a 19-week high...

• Investment flows into emerging markets have remained upbeat, with investors displaying a marked preference for local currency bonds. Inflows by nonresident investors reached $2.5bn in the week ended 10 February, which constitutes a 19-week high, while investment flows into emerging equity markets were positive for the third successive week at $1.5bn. 
• Latin America continued to be favoured most by investors, inflows into bond markets reaching $900m, followed by Emerging Asia with $712m and Emerging Europe with $700m in the week ended 10 February. Year-to-date, inflows into Latin America total $3.2bn. Next is Emerging Europe with $2.7bn and Emerging Asia with $1.1bn. Overall, inflows into emerging markets total $12bn year-to-date, with $7.7bn having been channelled into emerging bond markets and $5bn into equity markets.”

“Growth in emerging countries is looking up, even though it is rather heterogeneous, drawing strength from an improvement in industrial production and trade, notably exports. The IIF’s EM Growth Tracker rose for the third consecutive month in January. At the same time, the outlook for emerging economies remains for limited growth, with significant exposure to global policies, notably the impact on global trade were Donald Trump’s economic policy to favour protectionism.”

“The keen appetite for emerging assets could be in the nature of a technical correction after the strong selloff triggered by Donald Trump’s victory last November, but it may also be explained by uncertainties over the formation of the new US administration and over precisely when the economic policies promised by Donald Trump during the election campaign will actually be implemented, with any delay in this area or in the Federal Reserve’s monetary tightening likely to be supportive of emerging assets.”