The MSCI Emerging Markets Index is now up over 30% from its trough in January, and Latin American equities have even risen more than 50%. That prompts the question whether these improved conditions could now actually be priced in.
In the flow
But investors are looking favourably towards EM equities for a few more reasons. The first is about investment flows. While pretty much all investors were underweight emerging markets at the start of the year, this is still the case for most of them. Romig and Wennonen-Kärnä have been among the early birds to step up their investments in EM equities, Morningstar’s recent fund flows figures suggest, even though preliminary data from the International Institute of Finance show a surge in flows in July.
This gives EM equities a sort of momentum that helps to explain their popularity. Could you think of a precedent of an asset class on which investors were as bullish and underweight at the same time as on EM equities now? Probably not.
Another factor driving emerging market equities is simple: TINA (There Is No Alternative). In a world with scant investment opportunities, and with developed market equities looking expensive or fraught by political risk and unfavourable macroeconomic conditions, investing in emerging market equities looks comparably attractive. “[The popularity of] EM equities indeed is a relative story to some extent,” admits Romig.
“In emerging markets there is also room for more monetary stimulus which could underpin markets. In developed markets that’s not the case,” adds Wennonen-Kärnä. And then we haven’t even mentioned the case emerging market equity managers tirelessly continued to make over the past couple of years to, mostly to no avail, convince wary investors: valuations in emerging markets are on record lows compared to developed markets.
This all leaves us to a straightforward conclusion, according to Wennonen-Kärnä: “Emerging markets simply are a natural destination for investors now.”
