Emerging market ETF inflows surge as the central bank trade is ‘dead’

Aug 12th, 2016 | By | Category: Equities

Global flows into emerging market exchange-traded funds have surged as investors tire of the European and Japanese central bank trade and the capital market “sweet spot” of the post-Brexit world continues.

Emerging markets ETF redux by David Stevenson

Emerging market ETFs benefit as Central Bank trade is ‘dead’

According to Bloomberg data, US-listed emerging market ETFs have taken in about $17bn and Europe-based emerging market ETFs have gathered $12bn this year to 3 August. The money was spread across 54 different European-based ETFs, in addition to 46 US-based funds.

“This trend is deep and wide, it’s not just a few institutions getting excited,” Eric Balchunas, senior ETF analyst at Bloomberg, told ETF Strategy.

Part of the surge in emerging market inflows is explained by the lacklustre investment in Europe and Japan as the promise of central banks lowering rates and boosting the economy via quantitative easing is losing its shine.

Global ETF flows out of Europe and Asia Pacific to the end of July totalled -$30.7bn and -$0.7bn, respectively, according to BlackRock’s July Landscape report.

“The central bank trade is dead,” said Balchunas. “The markets have since struggled a bit. The easy trade is over. Could it come back? Yes. But outflows are steady – and in some months violent – out of Japan and Europe.”

Investors are taking profit from these regions, despite ongoing positive performance. The iShares MSCI Japan UCITS ETF (IJPN) is up 14% year-to-date in sterling terms, while the iShares MSCI Europe UCITS ETF (SMEA) has returned more than 10% in the same period.

Meanwhile, emerging market returns have outstripped both of these regions. The iShares MSCI Emerging Markets UCITS ETF (IEEM) has delivered more than 21% YTD in sterling terms, benefitting from low interest rates in the US. Globally, investors poured in $8.2bn into broad equity emerging market ETFs in July alone, BlackRock data found.

Oil prices have also rebounded after they tumbled around 50% in October 2014. WTI crude oil has risen from less than $30 per barrel at the start of the year to around $43 today.

But Balchunas said the emerging market rally was fuelled less by recovering oil prices and more by the “sweet spot” in capital markets post Brexit: the combination of no catastrophic economic news at the same time as the economy not being strong enough for the Fed to raise interest rates.

Global investors have also piled $10.7bn into emerging market debt ETFs in the search for yield so far this year, as the sector has been boosted by low interest rates in the US as well as recovering commodity prices.

Whether the rally in emerging markets continues is still on the table, said Balchunas.

“Can the emerging markets rally survive the Fed raising rates? I guess we will find that out,” he said. “In the past money has scurried in and out of emerging market ETFs around the Fed. But it could be that this trend is a genuine reallocation and people are becoming bullish.”

Only gold is doing better than emerging markets, added Balchunas. The gold price is up 20.5% in 12 months to $1334 per ounce. The ETFS Physical Gold (PHAU) has returned 25% year to date in US dollars, and gold funds have seen global inflows of $25bn since 1 January.

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