Emerging markets are having a comeback. According to Bank of America and research firm EPFR, a record $4.9 billion flowed into emerging market bond funds between July 14 and July 20 and another $4.7 billion into stocks of developing countries like Brazil, South Africa and India. This is the largest one-week inflow in a year.
The huge inflow of cash comes after years of heavy outflows from these regions, which have been beaten down by a slowdown in prices for commodities like iron, oil and copper.
Many investors are looking to emerging markets as a safe bet for their investment money as reported data indicates that these areas are gradually moving in the right direction.
And while the latest inflow is far from sufficient to make up for the outflows reported earlier in the year when oil prices were falling drastically, it follows the trend for stocks and bonds in other parts of the world. The last few months have seen oil and commodities turn around and this has encouraged investors to re-investigate the benefits of emerging markets.
On the other hand, investors have pulled back from U.S. and European stocks where $67 billion in funds were pulled out in the first six months of this year.
Reasons for Rebound
Analysts attribute several factors to investors’ renewed interest in emerging markets. Commodities have been making a slow comeback of late and this has been good for equity markets. The MSCI Emerging Markets Index is up 9.4 percent so far this year, better than European markets such as Germany and France.
Another reason for the bullish approach to emerging markets is the U.S. Federal Reserve. The central bank has hinted strongly that it does not plan to raise interest rates in the very near future. This is good for governments and companies that owe debt that must be paid back in U.S. currency. Higher rates help the dollar to rally and this makes debt payments more expensive.
Investors get more for their money by investing in emerging markets which are cheap at the moment. Stocks are trading at 12 times their future earnings. American equities are trading at 17 times their future earnings and European stocks are trading at 15 times their future earnings, after being crushed by U.K.’s Brexit vote to leave the European Union.
Whether this trend will continue is not clear but it does give investors at the moment a relatively secure choice for placing their money until the major global economies return to some semblance of strength and growth.