Big-money investors shift focus to Emerging Markets

Wealthy investors are increasingly directing their funds towards emerging markets in a quest for higher returns, signalling a potential long-term change in their investment strategies, a seasoned Bank of America economist revealed to Reuters.

Large global fixed income funds, which have greater financial resources than those solely focused on emerging markets, are making substantial investments in key regions, according to David Hauner, head of global emerging markets fixed income strategy at Bank of America.

Countries with promising growth or reform narratives, such as Mexico, Brazil, Turkey, India, and Poland, are attracting significant investment. Additionally, short-term investments in Egypt and Nigeria have gained popularity.

“I believe this marks the beginning of a structural shift,” Hauner stated, noting that investors are seeking specific country exposures rather than index products that combine a variety of emerging market assets.

“We are observing outflows from dedicated (funds) while simultaneously seeing engagement from crossover investors. This is a novel phenomenon. I don’t recall anything like this occurring previously.”

These investment flows suggest that investors are rewarding countries undertaking difficult reforms, such as currency devaluations and subsidy reductions, to stabilise their finances.

This trend contradicts closely monitored data from EPFR, which shows around $5 billion in outflows from emerging market debt funds, excluding China, so far this year.

Hauner explained that there is no single data source capturing all these investments. EPFR data typically includes exchange-traded and mutual funds with a fixed mix of emerging markets, often dominated by China.

As the fortunes of developing countries diverge, with China, for example, underperforming in returns, and typically riskier countries like Egypt rising due to substantial financial inflows from the UAE and the International Monetary Fund, a broader range of investors are keen to invest in specific emerging markets rather than through funds with a predetermined asset mix.

Alejandro Arevalo, head of emerging market debt at Jupiter Asset Management, noted that the unexpectedly strong performance of economies such as Mexico, India, and Vietnam has made them “investor favourites.” “Money has been flowing into these countries,” he said, highlighting their success in combating inflation and positioning themselves to benefit from trade tensions between the United States and China.

Arevalo suggested that traditional investment flows would soon reflect this shift.

Already, Hauner pointed out, there are “puzzle pieces” demonstrating current cash flows, including figures from the Institute of International Finance, which are based on balance of payment data. For instance, IIF data showed that foreign investors added approximately $32.7 billion to their emerging market portfolios in March, marking the fifth consecutive month of overall foreign net flows to emerging markets.

Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.

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