Year-to-date flows stand at $12.7bn, with investors attracted by the relatively high yields on offer in emerging markets. The bulk of the money is flowing into hard currency rather than local currency ETFs. While European investors have been increasing their investments in local currency debt since the summer, their American counterparts are sticking to dollar exposure, Blackrock notes.
The overall preference for dollar debt is interesting, since the outstanding stock in dollar-denominated EM debt has actually declined over the past couple of years, as the International Institute of Finance (IIF) recently noted. It shrunk by $70bn in the first half of 2016 to below $3.3trn this year alone as investors are replacing maturing dollar debt with local currency bonds. By contrast, the outstanding stock in local currency EM debt rose by $1.6trn to $26trn over the period.
No worries about liquidity
This means a growing pool of investors is chasing a shrinking asset class. Though foreign currency bond issuance has declined since 2013 and the asset class has indeed shrunk since the ‘taper tantrum’ in 2013, liquidity concerns are notably absent. Apparently, investors feel the chase for yield is more important than having redemption requests being met instantly.
Blackrock prefers to look at the bright side too. “We believe EM assets can withstand a gentle rate hiking path set out by the Fed, given the fundamental improvement emerging market economies have undergone in recent years,” the investment house said.