Investment flows into exchange traded funds and mutual funds that track emerging markets are surging as promising vaccine developments and a weaker U.S. dollar help fuel demand for riskier international markets.
According to Bank of America and EPFR data, investors funneled $10.8 billion into develop market stock and bond funds last week, the highest ever figure, the Wall Street Journal reports.
Investors were particularly focused on Indian and South Korean equities, along with Mexican government debt, according to Capital Economics.
The sudden spike in emerging market demand is a stark contrast against the huge sell-off earlier this year when the coronavirus pandemic first hit and dragged on global growth. Fund managers yanked over $70 billion from emerging markets over March, April, and May, according to Morningstar data.
Growing Optimism for Investors
With a potential Covid-19 vaccine coming up, investors are growing more optimistic.
“Investors are becoming more risk loving,” Jan Dehn, head of research at Ashmore Group, told the WSJ. “If the world is going to slowly get better, the case for emerging markets in particular becomes quite compelling.”
“Brazil, Mexico, India—where they’ve had severe Covid experiences, this will help them quite a lot,” Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management, told the WSJ.
Developing economies were previously among the worst hit during the pandemic. Adding to the pain, their governments and central banks weren’t able to spend as much as the U.S. or Europe to stabilize their economies, which has contributed to sharper contractions and slow recoveries.
Some investors are looking at the emerging markets as a value play. The MSCI Index, excluding China, is still flat for the year, whereas the S&P 500 has advanced about 12%.
The depreciating U.S. dollar has also helped the EM outlook. The dollar has weakened after aggressive fiscal and monetary policies in the U.S. Meanwhile, commodity exporting countries are benefiting from the cheaper dollar since most commodities are priced in USD.
“The currency strength against the U.S. dollar means that central banks can cut rates a bit further in this current environment, in places like South Africa and Mexico,” Edward Glossop, an economist with a focus on emerging markets at Capital Economics, told the WSJ.
ETF Investors who are interested in the emerging markets have a number of options to choose from, including the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), iShares MSCI Emerging Markets Index (EEM), Schwab Emerging Markets Equity ETF (NYSEArca: SCHE), and SPDR Portfolio Emerging Markets ETF (SPEM).
For more information on the developing economies, visit our emerging markets category.