Bigger investors pouring money into emerging markets belie EM outflows

A double-decker bus passes through Ting Kau Bridge at sunset in Hong Kong, China October 25, 2023. REUTERS/Tyrone Siu/File Photo

By Libby George

LONDON (Reuters) - Big-money investors are beginning to place more cash in emerging markets as they chase returns in what could be a structural shift in the way they allocate their money, a veteran Bank of America economist told Reuters.

Large global fixed income funds, which have more firepower than those dedicated to emerging markets, are placing bets in "huge sizes" in key places, David Hauner, head of global emerging markets fixed Income Strategy at Bank of America told Reuters.

Countries with positive growth or reform stories, including Mexico, Brazil, Turkey, India and Poland, are getting the money. Short-term bets in Egypt and Nigeria have also become popular.

"I think that is the beginning of a structural story," Hauner said, adding investors wanted specific country exposures, rather than index products that package together a range of emerging market assets.

"You're seeing outflows from dedicated (funds) and at the same time people involved in crossover. That is the new thing. I don't recall that this has ever happened before."

The flows suggest that investors are rewarding certain countries as they implement reforms that are painful to citizens, such as currency devaluations and subsidy cuts, in an effort to shore up state finances.

They also belie closely watched data from EPFR that show some $5 billion in outflows year to date from emerging market debt funds, excluding China.

Hauner said there was no single data point that captured the investments. EPFR data reflects exchange-traded and mutual funds that comprise a set mix of emerging markets, often dominated by China.

But as fates fracture among developing countries, with China, for example, lagging in returns, and other typically riskier countries, such as Egypt, on the rise after an influx of cash from the UAE and the International Monetary Fund, a wider range of investors want to place money in select emerging markets - rather than via a fund with a set mix of assets.

Alejandro Arevalo, head of emerging market debt at Jupiter Asset Management, said the unexpectedly strong performance of economies such as Mexico, India and Vietnam had made them "darlings of investors."

"Money has been flowing in into these into these countries," he said, adding that they had done well in battling inflation and positioning themselves to benefit from trade tensions between the United States and China.

He said traditional flows would likely reflect the shift soon.

Already, Hauner said there are "puzzle pieces" illustrating the current cash flows, including Institute of International Finance figures, which rely on balance of payment data.

IIF data, for example, showed foreigners adding about $32.7 billion to their emerging market portfolios in March, a fifth consecutive month of overall foreign net flows to emerging markets.

This year's rally in high-yield bonds from Egypt to Pakistan, and the market's absorption of billions in bond issuance from Turkey to Ivory Coast, also lend credence to the view of inflows.

"It just reflects that EMs (are) growing up and that global debt investors want to have a fair share of exposure," Hauner said. "They're more stable than it used to be. And yet they're offering quite attractive yields."

(Reporting By Libby George. Editing by Karin Strohecker and Toby Chopra)