Emerging market fund sales hit 42-month high
Sales of European mutual funds that invest in emerging markets hit a 42-month high in July as investors looked to take advantage of a rally in the asset class.
Almost €9bn was invested in emerging markets-focused mutual funds in July, according to figures for European-domiciled funds from Morningstar, the data provider.
It marked the highest levels since January 2013, when investors placed €10.7bn into emerging market funds just a few months before the US’s “taper tantrum” that would result in billions being withdrawn from developing market debt funds.
Ali Masarwah, editorial director for Europe, the Middle East and Africa at Morningstar, said investors have returned to the asset class this year in an attempt to escape low yields in developed markets and take advantage of potential growth in some emerging market countries.
“People are desperately seeking yields and emerging market bonds are still relatively attractive,” he said. “There is also the fact that [fund] flows follow performance. Emerging markets are outperforming global markets. It is really remarkable. So we are seeing money move.”
The MSCI Emerging Market index, a benchmark that includes large and mid-cap companies in 23 countries, is up by more than 16 per cent this year. It lost more than 20 per cent in 2015.
Emerging markets fell out of favour in 2013 after the US Federal Reserve began gradually reducing the amount of money it was feeding into the economy, leading to a spike in US Treasury yields — and leaving developing market bonds less attractive.
This combined with concerns about falling commodity prices and the strength of the US dollar against local currencies, both of which hurt emerging market returns.
Alexis de Mones, a portfolio manager at Ashmore, the London-listed fund manager that has seen its share price rally on the back of the rebound in emerging markets, said sovereign wealth funds, insurance companies and central banks have also returned to the market this year.
“We think there is huge remaining pent-up demand for emerging market bonds, and it is not just from people that are captured in mutual fund data,” he said.
Morningstar’s figures showed a strong rebound in emerging market bond funds since March, with almost €5.7bn flowing into the products in Europe in July alone.
Gary Greenberg, head of emerging markets at Hermes Investment Management, the £26bn fund house, said: “[The investor interest in emerging markets] is mostly a search for yield and that search for yield has spilled over into equity markets. The question now is: can emerging market profits justify the recovery that we have seen?”
David Hauner, head of emerging market strategy at Bank of America Merrill Lynch, warned earlier this month that a “bubble” is “highly possible” in emerging markets next year.
However, the International Monetary Fund said it expects the pace of gross domestic product growth in emerging markets to increase every year for the next five years while developed markets stagnate.
Roy Scheepe, senior client portfolio manager of emerging market debt at NN Investment Partners, the Dutch fund house, agreed: “European investors will continue to invest into emerging market debt funds as the differential between the yield of developed markets bonds and emerging markets is still significant.”