by Jake Moeller.
I recently visited a fund buyer conference in London that exclusively showcased a selection of emerging-markets (EM) equities funds.
In the current environment I had expected the conference to be potentially a febrile affair, but I was struck by the pervasive sense of calm–from the fund managers, fund buyers, and asset allocators alike.
Outflows in EM equities Q3 2018 have been material
It’s understandable to expect a certain amount of enthusiasm for an asset class at a conference held in its honor, but Lipper data reveals that investors overall have retreated from the asset class. For Q3 2018 pan-European-based funds in the Lipper Equity Emerging Markets Global classification had estimated net outflows of €5 billion. To the nine months ended September 30, 2018, the total overall net inflows for EM equity funds were only €0.3 billion. For the same period in 2017 the estimated net flows were a relatively robust €15 billion.
EM equity performance has struggled to the end of Q3 2018, returning a negative 9.4% in U.S. dollars, compared to the Lipper Global Equity US classification, which returned a positive 8.7% (in USD). EM’s poor performance has resulted in some US$103 billion being wiped off the value of these funds worldwide over the nine months to the end of September 2018.
Asset allocators remain largely unmoved
It appears much of the outflows may have been “hot money.” Institutional investors have barely stirred. The Lipper Life Office Asset Allocation Survey for September 2018 reveals the average portfolio allocation to EM equities in the Flexible Investment Sector was 2.0%. For January this exposure was 2.2% and for September 2017 2.3%. That is coming down from a small base certainly, but it is hardly a damning indictment for the asset class.
Figure 1. Performance Chart – EM Equities v Global and US Equities (in USD, 9 months to September 2018)
Source: Lipper for Investment Management.
The headwinds faced by EM equities are readily identifiable by many analysts: rising interest rates, potential USD strength, the fallout from escalating trade wars, and geopolitical issues, dominated recently by Turkey. These headline issues may have spooked many investors, but EM equities managers and asset allocators themselves seem to be keeping cool heads.
Do we understand EM markets better today?
Perhaps underlying fundamentals for EM remain reasonable enough to support strategic investors’ longer-term theses for the asset class. Year-to-date earnings in EM stocks have largely remained strong, and returns have been dominated by exchange rates.
Hermes Investment Management’s Head of EM, Gary Greenburg, put it quite simply in his recent Lipper Alpha podcast: “What people believe to be the case can be more powerful than what is the case. People believe that EMs are cyclical plays, they believe that they are affected by the USD, they believe that they are capital importers and commodity exporters. In fact, this no longer characterises EM.”
Perhaps this time, the significance of these structural changes is finally beginning to sink in and reduce panic levels.
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