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Is EM sentiment beginning to shift?

According to NN Investment Partners, emerging markets saw $87bn in outflows in September, significantly better than the $128bn in outflows recorded in August.

The firm’s proprietary EM growth momentum indicator showed another small improvement over the last week, NN said on Friday, but it said, with EM capital flows remaining negative, it is difficult to expect that EM currencies can appreciate much or that financial conditions in EM can become much easier.

Backing up this trend, Bank of America Merrill Lynch’s latest weekly Flow Show report indicates that in the past week, emerging market equities reported their first weekly inflows in 14 weeks, the first signs, BAML suggested of a possible rotation to weak US dollar plays.

The question for investors is: should this be read as a small relief rally after a significant fall or is it the beginning of a more thorough turn around in sentiment?

Maarten-Jan Bakkum, senior emerging markets strategist at NN is of the view that the recent rebound of EM assets has been driven by a combination of expectations of later US interest rate hikes and some signs of improving EM growth dynamics.

But, he said: “let’s be clear: EM growth momentum remains in negative territory, but less so than in the summer. As long as capital leaves the emerging world, pressure on EM interest rates will remain. Average EM one-year local bond yields have been above 6% for one-and-a-half year now, and it will be difficult to see them much lower anytime soon.”

According to Bakkum, one of the key factors driving EM flows and asset prices is the Chinese growth picture, and here the September trade data confirmed once again that domestic demand growth in the country is still slowing.

That said, the firm has now closed its underweight positions in both emerging market equities and debt.

tom@ybc.tv

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