Posted inEmerging MarketsEquitiesFixed Income

Investors continue adding to EM holdings

Emerging market debt funds have been the most popular asset class with European investors so far this year by some distance, seeing almost €15bn in net inflows year-to-date according to Morningstar data. Investors also continued to pile into emerging market equities, albeit at a somewhat slower pace.

The popularity of emerging market assets this year seems very much part of a broader risk-on move. “We have been positioning our portfolios towards a riskier stance in the past three months, increasing our exposure to emerging market debt and more recently also equities,” says Alvaro Martin Sauto, head of funds-of-funds at Bankia in Madrid.

“In emerging markets, we always move into bonds first, to test the water, and if that works out well we move further in through taking positions in equities.”

Almost all of the flows went to broad-based global emerging market products, in a continuation of a trend established last year. That picture corresponds with Expert Investor asset allocation sentiment data: almost four in 10 European fund buyers plan to increase their exposure to global emerging market equities over the next 12 months, but only a quarter or so of them intend to step up their allocation to Asia ex-Japan equities.

The active edge

Active and passive flows in EM equities are more or less equally balanced, while virtually all debt flows are into active funds. This contrasts with European and US equities, where index trackers dominate. “We prefer to use active managers in EM, because as a European investor it’s difficult to assess what might be hidden under the carpet, or how much of what is happening in China is actually priced in.”

Developed equities struggle – Macron to the rescue?

Developed equities, meanwhile, have so far failed to profit from the increased risk appetite. European, Japanese and US equities saw combined net outflows of €6.5bn. In a sign investors have started to doubt the viability of the ‘Trump rally’, it was the first time since Donald Trump won the US presidential election that all three asset classes saw simultaneous outflows.

But April may look quite different as markets have embraced the probable winner of the French presidential race, Emmanuel Macron. Therefore, Europe may well take over from Trump as the main market catalyst over the coming months, as the latter struggles to fulfil his campaign pledges without inflicting major harm on the world economy.  

Part of the Bonhill Group.