Emerging market sell-off burns investors
The emerging market sell-off of the past few days has been brutal and will have come as a great surprise to many investors who have been ploughing money into emerging markets at the expense of developed market exposure since Brexit.
Emerging markets have enjoyed their strongest and longest outperformance in six years during 2016. According to the Financial Times, which cites data from BNP Paribas, emerging market stocks have outperformed their developed market peers by 12% in total return dollars year-to-date. According to Morgan Stanley, emerging market equities have seen ten straight weeks of hefty inflows, the longest cumulative series of inflows in more than two years.
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There seems to be a broad consensus among investors that emerging market equities present a much better investment option than their developed market peers. Emerging markets are returning to growth after several years of instability while developed markets seem to be struggling to pull themselves out of a low growth environment. With attractive growth rates on offer and better dividend yields than the average developed market index, who can blame investors for chasing returns overseas?
Emerging market sell-off: Inflows predict peak
The scale of the flight to emerging markets is highlighted in a research note from Jefferies, which was published at the end of last week. The report looks at fund flow trends around the world. Global equity funds recorded a marginal $78 million net inflow for the first week of September but of these flows developed market equities saw outflows of $1.6 billion while emerging market stocks had inflows of $1.7 billion. In the US, there was a mild equity liquidation of $1.3 billion. Small caps and the health care sector experienced more significant withdrawals. European equities saw US outflows of $700 million extending a record long outflow streak. In Asia excluding Japan, both mutual fund/ETF investors were net buyers for the week. Hong Kong equities have seen inflows for six straight weeks with the last injection totalling US$157 million. Buying in Korea totalled US$630 million, Taiwan totalled $480 million, while Thailand and India have witnessed foreign buying extending to 12 and ten consecutive weeks.
In other sections of the market, the reach for yield continued to dominate the bond market. Inflows into investment grade corporate bonds are now in their 29 th consecutive week while flows into corporate bonds are now at five consecutive weeks at the expense of government bonds. Meanwhile, global commodities recorded an inflow for the first time in four weeks, mostly owing to a return of inflows in gold. In the US money markets, year-to-date unwinding rose past the$100 billion mark for the first time this year.