Nigeria, Other emerging markets return to favour

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After removing billions of dollars in 2016

Nigeria is mired in its worst recession for 25 years. Militant attacks are a constant threat, dollars are scarce and the currency is weakening. Meanwhile, no one seems to know the exact wherebouts of the country’s 74-year-old president.

Yet proving that domestic crises don’t matter when emerging markets are in favour, investors overlooked all of that last week — putting forward bids of almost $8bn for a $1bn Nigerian bond on offer.

The sale is the latest evidence of a rally that has given developing nation stocks, currencies and bonds a remarkably strong start to the year. Yield premiums demanded by investors to own emerging-market bonds instead of US Treasuries have fallen to a two-year low, while the MSCI index of emerging market stocks is up more than 8 per cent — comfortably outpacing developed-world peers such as the S&P 500, FTSE 100 and Euro Stoxx 600.

One explanation is the return of international money. After removing billions of dollars from emerging markets in 2016, investors are now pouring it back in. More than $1bn was allocated to developing world equity funds in the week to last Wednesday and $2.5bn into bonds, according to data from EPFR.

Fund houses that focus on emerging markets like to argue that developing economies, with their large working age populations and growing middle class, will eventually replace developed markets on the global totem pole.

Nigeria’s bond sale benefits from EM rally Nigeria’s bond sale benefits from EM rally But that’s the long-term view. Day-to-day investment decisions still depend largely on external factors — particularly the state of the US economy.

Last year, talk of fiscal spending and tax cuts spurring a growth spurt in the US led to sharp outflows from developing world assets — with $5bn withdrawn from emerging market equities the week after Donald Trump won the presidential election.

In recent months, investors have retraced some of their earlier expectations about the so-called Trump Trade, lowering the odds of aggressive fiscal stimulus and consecutive interest rates rises, causing the dollar to soften.

Mr Trump has, however, vowed to make a “phenomenal” announcement on tax soon. If investor focus returns to US growth, demand for emerging markets could soon prove as elusive as Nigeria’s president.

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