Emerging markets have been hogging the limelight lately, courtesy of the $5.1 billion worth of cash inflows over the seven-weeks ended August 17 (per EPFR). Much of the surge in inflows can be attributed to lackluster prospects in developed economies which are leaving investors with little option but to look for growth elsewhere.
Emerging Markets See Rising Inflows
Emerging markets have been attractive for investors willing to take risks. The MSCI Emerging Markets Index was up 12.21% year to date as on September 2, with majority of gains in the last three months.
The emerging markets PMI data at 51.7 for July is also a significant improvement. After April 2013, this is the first time that the figure compared favorably with the PMI data for developed countries. The composite PMI for the four major emerging economies, Brazil, Russia, India and China, was 53.5 in July, indicating the largest expansion since the beginning of 2013.
As per Bloomberg, stocks of emerging markets are headed toward a 13-month high, buoyed by the strengthening of currencies. The MSCI Emerging Markets Currency Index increased for the third consecutive day on September 5. As expectations for a Fed rate hike this year declined, US dollar’s rally petered out, leading to a rebound in EM currencies.Two of the largest global investors, Pimco and BlackRock, have also announced a EPFR for the emerging markets.
Developed Markets Lose Appeal
While the emerging markets have their own appeal, it is not the only reason for the capital inflows. Political & monetary policy uncertainty, negative interest rates and rising terror attacks have also acted as deterrents to investors in developed economies.
The biggest surprise in the last few months was the results regarding the Brexit vote. Although UK’s economy fared relatively well in the second quarter of 2016, the period post Brexit in the time-frame was small. As per Markit, a survey of the first two months of the third quarter show a composite PMI of 50.3, rebounding from the 53.2 recorded in August. Moreover, economic expansion is expected to be slower at 0.1% as compared to 0.6% in the second quarter. The uncertainties prevent large scale investment in such markets.
Recently, the August jobs report for the U.S. lagged expectations as unemployment remained at 4.9% for the third consecutive month. The release has deferred chances of a rate hike until December, further encouraging investments in emerging markets.
Meanwhile, in Japan, growth opportunities and inflation remain low. Despite the government’s repeated efforts, the central banks inflation target of 2% is pretty high. The GDP of the economy grew at 0.2% for the second quarter, much below expectations, while the consumer price index dropped for the fifth consecutive month by 0.5% in July.
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