Investors’ appetite for EM risk improved over the past week. As we have been arguing for sometime, benign external backdrop combined with improving domestic fundamentals make a stronginvestment case for EM assets. Further, our EM flow models indicate strong inflows into the assetclass through to next year.
The recent FOMC decisions came in line with HSBC’s long held view of a gradual andpredictable tightening approach, low-for-longer long-end UST yields and a stable-to-soft USD.
Investors’ preference for EM funds over DM continue, in % of AUM, during the week ended 13September. Among EM bond funds, Thailand, Brazil, Mexico and India grasped most of theinvestments in USD while India and Frontier markets gripped largest inflow in % of AUM. Within EMequity funds, China, S. Korea and Brazil attracted the biggest deposits, in USD, whereas Colombia,S. Korea, Chile and Brazil absorbed the most inflows in AUM. Large inflows to non-ETF andinstitutional funds continue to support EM bond funds, while solid gains in ETF and institutional fundsenhanced equity funds (p.13). In DM, US and Global funds led the gains within bond funds. Flows toHY remain volatile, showing outflows this week. Meanwhile, strong inflows to Japan equity fundslifted DM equity funds.
The initial market reaction has been less supportive for EM, as the “dots” stayed the same for2017 and 2018 versus expectations of somewhat lower Fed funds rate projections, but thelonger terms projection, or “dot”, did actually come down. Domestically, the EM growth outlookhas strengthened, led by China, and macro balances have improved (smaller external excesses,lower inflation and higher real interest rates). Moreover, several large EM countries areundergoing structural improvements, like China, India, Indonesia, Argentina, Brazil and Mexico.
HSBC’s early signalling system suggests sturdy demand for EM risk across the board (p. 14).
Overall, we still believe that some profit-taking episodes and spikes in volatility should be takenas an opportunity to add EM risk as valuations and positioning do not appear overly stretched.
Likewise, EM fund flows momentum (p. 5) and dispersion indicators (p. 8) points to similar dynamics.
Net inflows to EM funds continue to grow faster than to DM funds for the fifth week in a row, in %of AUM, during the week ended 20 September. Among EM bond funds, most of the inflows wentto Thailand, Mexico, India and Brazil in USD and to India, Thailand and Frontier markets in % ofAUM. Within EM equity funds, China, Brazil and South Korea captured the largest deposits, inUSD, whereas Chile, Brazil and Frontier markets grabbed the most inflows in AUM. Larger inflowsto non-ETF and institutional funds continue to support EM bond funds, particularly EXD, whilesolid gains in ETF and institutional funds boosted equity funds (p.13). In DM, US funds lifted bondfunds with HY posting solid inflows. Meanwhile, inflows to European and Global equity fundssupported DM despite withdrawals from Japanese and US equity funds.
Meanwhile, daily financial account portfolio flows show a surge in inflows to bonds (seven countries),mainly Indonesia, Thailand and S. Africa, and small inflows to equities (eight countries), as stronginflows to Brazil and Thailand faced outflows from Indonesia and S. Korea. (p. 15).
HSBC’s early signalling system continues to suggest stable demand for EM risk (p. 14).
On total return results, LCD was flat (15.7% y-t-d), as losses in EM FX (0.3% w/w; 7.2% y-t-d) werecompensated by gains from carry (0.13% w/w; 4.6% y-t-d) and yield (0.15% w/w; 4.4% y-t-d). Also,EXD added 0.2% w/w (9.5% y-t-d), on Ukraine, Argentina and Venezuela. EM Corp was flat (8.1%y-t-d), as gains in HY (0.2% w/w; 8.8% y-t-d) were affected by losses in IG (-0.1% w/w; 7.6% y-t-d).
Similarly, EM fund flows momentum (p. 5) and dispersion indicators (p. 8) points to similardynamics. Meanwhile, Daily financial account portfolio flows show inflows to bonds (sevencountries), mainly Indonesia, India and S. Africa, but outflows from equities (eight countries),large outflows from S. Africa and India shadowed gains in Brazil and Thailand (p. 15).
EM equities jumped 1.5% w/w (27.5% y-t-d) driven by China, Thailand and Czech Rep.