By Anna Hirtenstein
The amount of money flowing into emerging-market funds last week
hit an all-time high, as advances in vaccine development and a
weaker dollar boosted investors' risk appetite.
Investors channeled $10.8 billion into funds that invest in
emerging-market stocks and bonds, according to research from Bank
of America and EPFR data, a sum the bank said was the highest ever.
The largest net purchases by foreign investors included Indian and
South Korean equities, as well as Mexican government debt,
according to data from Capital Economics.
The activity marked a turnaround for many developing economies,
which have been largely shunned this year due to the spread of the
coronavirus and the subsequent hit to global growth. Fund managers
pulled more than $70 billion out of emerging markets in March,
April and May, according to Morningstar.
But positive developments for vaccines in recent weeks have
investors preparing for life after Covid-19, and some are making
bets on how to reap the biggest rewards.
"Investors are becoming more risk loving," said Jan Dehn, head
of research at Ashmore Group. "If the world is going to slowly get
better, the case for emerging markets in particular becomes quite
compelling."
That is because many developing nations were hit the hardest by
the pandemic. Their governments and central banks weren't able to
spend anywhere close to as much as the U.S. or Europe to support
their economies, leading to sharp contractions and flimsy
recoveries.
Many emerging-market stocks and bonds still have bargain-bin
prices -- an MSCI index that tracks emerging-market stocks,
excluding China, is essentially flat for the year. In comparison,
the S&P 500 has rallied almost 12%.
There was yet another announcement of a milestone in vaccine
research on Monday, this time from AstraZeneca PLC, which has been
working with researchers at Oxford University in the U.K. It said
its vaccine is up to 90% effective and will be priced between $3
and $5 a shot -- significantly cheaper than those developed by
competitors such as Pfizer Inc., BioNTech SE and Moderna Inc. It
also said that it was seeking to supply low-income countries.
"Brazil, Mexico, India -- where they've had severe Covid
experiences, this will help them quite a lot," said Shaniel Ramjee,
a multiasset fund manager at Pictet Asset Management.
He is overweight emerging markets, meaning his fund holds more
than the benchmark it tracks. China forms the bulk of his
allocation, but he said he has also bought some Brazilian and
Mexican assets recently.
Brazil's Bovespa stock index and Mexico's IPC index have both
climbed more than 14% so far this month. The yield on Mexico's
benchmark 10-year bond fell below 5.9% on Monday, the lowest level
in over nine weeks.
These countries are also expected to perform well because of
their focus on commodity exports, which should get a boost from
strong Chinese economic growth and a weaker U.S. dollar. China
reported a 4.9% expansion in the third quarter, and economists are
forecasting its strength to continue into next year, with growth
predicted to be over 8% in 2021.
Meanwhile, the dollar has been falling for several weeks, as the
Federal Reserve is expected to continue to flood the market with
dollars to support the U.S. economy. The WSJ Dollar Index, which
measures the dollar against a basket of its peers, on Tuesday
hovered close to a 2 1/2 -year low.
Oil, metals and most other major commodities are priced in
dollars, so this delivered a boost to demand and sellers. Countries
that generate a significant portion of their gross domestic product
from natural resources, also including Russia and South Africa, are
expected to benefit.
Their currencies are reflecting this. The ruble has appreciated
4.2% against the dollar this month. The South African rand and
Mexican peso both traded close to their strongest levels since
early March on Tuesday.
"The currency strength against the U.S. dollar means that
central banks can cut rates a bit further in this current
environment, in places like South Africa and Mexico," said Edward
Glossop, an economist with a focus on emerging markets at Capital
Economics.
Kieran Curtis, an emerging-market fund manager at Aberdeen
Standard Investments, has bought Mexican and Brazilian government
debt for this reason. He has also recently snapped up bonds issued
by Caribbean islands such as the Bahamas in a bet that the vaccines
will boost tourism.
To be sure, net flows to emerging markets for the year are still
negative, meaning investors pulled more money out of developing
countries than they have put back in. But some analysts expect this
balance to shift.
"This mix of currency and asset returns that really favor
emerging markets, we see these trends extending into 2021," said
Mr. Ramjee. "The EM story is ticking many positive boxes."
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com
(END) Dow Jones Newswires
November 24, 2020 10:08 ET (15:08 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.