International investors are gingerly returning to emerging markets, says Avantika Chilkoti for The Wall Street Journal. After dumping a record $55bn of stocks and bonds in the eight weeks to mid-March, foreigners bought $4.1bn in emerging market assets in May.
The new investment is limited to favoured regions. China has been the standout pick, while non-residents also bought $1.6bn in Indian stocks in May. By contrast, the month saw $1.1bn pulled from stocks in Brazil and $880m from Turkey.
The MSCI Emerging Markets index has performed relatively well given the pandemic, slipping by 5% so far this year. That compares very favourably with the FTSE All-Share’s 19% retreat, but conceals a wide range of performance. The Korean Kospi, which makes up 13% of the MSCI EM index, is down just 3% so far this year, while Brazil’s Ibovespa has plunged by 19%.
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The gulf reflects the growing “heterogeneity” of emerging markets, says Trieu Pham of ING. Many Asian countries have proved better at containing the coronavirus and have a better growth outlook. The International Monetary Fund forecasts that Asian economies will shrink by just 0.8% for 2020 as a whole, compared with a painful 9.4% contraction in Latin America. South Africa and major oil exporters are also likely to be hit hard.
Emerging market stocks are at the mercy of Wall Street
Yet, as the saying goes, the stockmarket is not the economy. The asset class is proving “more sensitive to global developments than local ones”, writes Oliver Jones for Capital Economics. When developed markets crashed in March Latin American markets fell even harder despite few local cases. Now the region is the epicentre of the global outbreak, but stocks have picked up even as the local health situation has sharply deteriorated.
As with so many things in contemporary financial markets, the underlying cause is easy central bank money, says Jonathan Wheatley in the Financial Times. The “tidal wave” of monetary stimulus unleashed by major central banks has buoyed assets everywhere and sent international investors scurrying back to emerging markets in a hunt for yield. The second reason for the unlikely optimism is that commodity prices have been rising, adds Jones. Commodity firms account for “an unusually large share of equity indices” in emerging markets outside Asia.
On a cyclically adjusted price/earnings ratio of 13.7, value investors will still find lots of opportunity in emerging markets. Any near-term weakening in the dollar would also be a boon for emerging market businesses, which often borrow in dollars but earn revenue in local currency. The inflows of new investment money are likely to gather pace.
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