Low interest rates bolster EM funds inflows

  • Sustained weakness in the US dollar plays key role

Investors ploughed more cash into emerging market funds in the week since the asset class’s stock benchmark touched its highest level since 2014. EM equity funds counted $2.2bn of inflows in the week to August 2, while EM bond funds recorded $1.9bn of capital commitments, according to flows tracked by EPFR.

The additions lift inflows since the year began to nearly $90bn for the two fund categories. Enthusiasm for emerging markets has been bolstered by low interest rates across the globe and sustained weakness in the US dollar.

The MSCI Emerging Market stock index has climbed more than 23 per cent this year. This week, the sale of a five-year dollar denominated bond by Iraq at a yield of 6.75 per cent attracted $6.6bn of orders, underscoring the scale of demand for EM paper.

“Economic growth is generally stable, narrowing current account balances — a sign of improving fiscal health — and emerging market currency volatility is low,” said Bill Merz, a strategist with US Bancorp Wealth Management. “While valuations remain elevated, the fundamentals appear somewhat compelling for investors with a higher risk tolerance.”

EPFR noted that money managers of EM bond funds “have been rotating exposure from larger to smaller markets’’ with allocations to Brazil and Russia at 16- and 28-month lows respectively. In contrast, average weightings for Nigeria and Ukraine have risen to levels last seen in the fourth quarter of 2014 and 2011 respectively.

In the developed world, investors showed a continued preference for European stock funds over their US counterparts. European equity funds notched up their fourth consecutive week of inflows, although additions decelerated from a week prior. Among specific areas of European markets, EPFR estimated an outflow of $51m for UK equity funds to a $109m inflow for German equity funds.

Europe and Europe ex-UK Regional Funds attracted more than $1.1bn of buying. EPFR noted ‘’managers of Europe Equity Funds are, on average, allocating a third of their portfolios to the industrial and financial sectors, with allocations to the latter at an 18-month high’’. US stock funds suffered their seventh straight week of redemptions, with outflows since mid-June topping $22bn.

This came as firmer earnings prompted Wall Street to set a string of record closing highs, led by the Dow Jones Industrial Average rising above 22,000 for the first time. That bullish performance has failed to entice inflows, noted EPFR, which added: ‘’This reluctance to be the last one standing when the current bull market finally hits the wall is particularly pronounced among retail investors.

Since the beginning of 2012 retail investors have pulled some $840bn out of US Equity Funds, whose collective performance gains over the same period are just shy of 100 per cent.’’

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