Emerging Market Inflows: Inflow Momentum of 22 Weeks
July 2017 – The current Emerging Market-dedicated fund inflow momentum has now lasted 22 weeks and amounts to total inflows of US$38.6bn (or US$41.9bn YTD). This makes it the strongest sustained period of inflows out of the five inflow surges since the taper tantrum (2013 surge in U.S. Treasury yields).
This is largely supported in African exposure by a strong EM carry trade – supported by a commodity price rally, falling bond yields, and a weak USD, all of which have assisted in propping up South African assets. Further assisting this support, EM investors have largely ignored politics in South Africa and focused on personalities instead of political fundamentals, which ultimately remains to be seen the impact of this approach.
The search for yield has led investors to shift their assets into such EM zones despite the fact that risks of governance, political uncertainty, volatility in commodity prices and liquidity remain the major risks in emerging countries. Given this risk is the premium that are so actively sought. “It’s an alliance of convenience,” said Michael Power, a strategist at Investec Asset Management. “Emerging markets want to borrow and on the other side are people who want the yield.”
Furthermore, EM equities have had a hugely solid start to the year, with the MSCI emerging benchmark up nearly 18 per cent since the start of 2017.
In conclusion, the convergence gap preposition of developing economies to developed economies is still in place despite the risks, and this is one of the reasons why EM countries continue to register higher growth rates. In economic terms, capital and labour deepening is still possible in EM, while in developed economies only technological progress can trigger high levels of growth.