Investors are piling back into riskier emerging market stocks and exchange traded funds after the Federal Reserve signaled that the time wasn’t right to change its easy money policy.
According to the Institute of International Finance, cross-border portfolios flows to emerging markets “turned around sharply” both before and after the Fed’s decision to leave rates unchanged last week, reports Jonathan Wheatley for the Financial Times.
IIF revealed that last week’s inflows marked a reversal after 35 days of outflows from emerging market funds. The institute also said that flows turned positive early last week ahead of the Fed announcement, which reflected increased anticipation of a delayed Fed rate hike.
ETF investors were also jumping back into the developing markets. Emerging markets, which previously saw heightened outflows on concerns of a higher interest rate, bounced back as an environment of easy money would help fuel riskier trades.
For instance, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI Emerging Markets Index, was the second most popular ETF over the past week, attracting $1.0 billion in net inflows, according to ETF.com. EEM, though, has experienced $6.3 billion in outflows so far this year.
EEM was up 1.1% over the past week and was 3.1% higher over the past month. However, the fund is still down 13.4% year-to-date.
According to a monthly fund manager survey from Bank of America Merrill Lynch, exposure to emerging market stocks remained at a record low. [Unpopular Emerging Market ETFs May Reward Patient Contrarians]
Some investors may have taken the recent Fed inaction as a signal to jump on a relatively cheap asset that has been selling off this year. EEM currently trades at a 11.3 price-to-earnings ratio and a 1.4 price-to-book, whereas the S&P 500 index has a 17.6 P/E and a 2.4 P/B.
Nevertheless, despite the Fed’s dovish stance, potential emerging market investors are still left with the impending rate hike around the corner.
“This isn’t necessarily positive news,” Mark Mobius of Franklin Templeton Investments, one of the biggest specialist EM fund managers, told the Financial Times. “We are still left with the uncertainty that has been plaguing the market for some time.”
iShares MSCI Emerging Markets ETF
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.