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EM rout helps US equity inflows in July

Investors had been decreasing their allocation to the asset class since the beginning of the year, matching the bearish sentiment picture derived from EIE data research. Sellers have consistently outnumbered buyers this year, though fund selectors and asset allocators in a few countries, notably France, Portugal and Luxembourg, have started to become optimistic about US equities again.

Though this week’s volatile US stock markets suggest the renewed confidence in the asset class may be short-lived, the return to US equities (which coincided with very strong inflows into European equities) should perhaps be placed into a broader context, suggesting it could well last.

Great Rotation

As Expert Investor Europe reported yesterday, investors have started to shift their assets from emerging markets to developed market equities. This is a phenomenon we have seen before: halfway 2013 expectations that the Fed would start to unwind its QE programme triggered capital outflows from emerging markets and into US equities. At the time, the rotatory move from EM to US US equities lasted five months, and EM equity performance significantly lagged US equity returns over the period.

Both EM equities and EM debt were affected at the time, and so is the case now. While emerging market bonds had seen net inflows of €3.5bn in the year until the end of June, a net €1.5bn left the asset class in July.   

Whether the Fed will delay a possible rate hike from September to later in the year or not, it probably will happen at some point. So a few more months of outflows from EM equities and inflows into the US are probably on the cards. The recent turmoil in China only adds to this expectation.

Part of the Mark Allen Group.