Strong positioning data suggest investors may have little appetite for more
Jonathan Wheatley
For emerging market investors, 2019 began promisingly. The US Federal Reserve has held back from adding to a run of interest rate rises that hurt EM assets last year, while fears of a more bruising trade war between the US and China have receded.
However, a January rally in the bonds and stocks of many developing economies has since fizzled.
Given the more benign backdrop delivered by a shift in policy from the Fed, the failure of EM markets to sustain their zip may lie in the fact that investors began the year with plenty of exposure to them, according to Robin Brooks at the Institute of International Finance, an industry association and gatherer of EM data.
The IIF examined balance of payments data from 23 emerging economies, broken down by cross-border flows and shifts in asset prices, to see how the value of foreign holdings of each countries’ securities, such as stocks and bonds, have changed.
Their research underlined that a decade of quantitative easing by western central banks triggered a flood of foreign money into EM assets.
Between 2010 and 2018, investors poured money into the majority of EM countries, with only Russia and Hungary missing out over the period. Although the effect of changes in the prices of EM assets was less uniform, the broad trend was that the value of foreign holdings of securities, as a share of total GDP, rose across EMs.
Mr Brooks and his colleagues also found that, despite last year’s rout in EM assets, most foreign investors took the hit to valuations without reducing their exposure. The IIF’s data suggest that flows were mildly negative, at most.
The analysis indicates that fund managers began the year with significant exposure to EM assets, putting a curb on their appetite for more. Until there are signs that global growth, and the Chinese economy in particular, can recover some momentum, the EM rally may well stay on hold.
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