Investors piled into emerging-market stocks and bonds at near-record levels, as falling inflation and the reopening of China’s battered economy helped reverse last year’s slide.
Emerging equity and debt markets have attracted $1.1bn a day in net new money this week, according to high-frequency data tracking 21 countries from the Institute of International Finance. The speed of cross-border flows is now second only to the spike in coronavirus lockdowns in late 2020 and early 2021, surpassing previous peaks in the past two decades.
The strong inflows underline a major shift in sentiment this year after a bleak performance for emerging markets leading up to 2022. Declining global inflation has prompted many market participants to bet that major developed market central banks, including the US Federal Reserve, will stop raising interest rates. . interest rates – eliminating a major source of pain for emerging markets.
Jahangir Aziz, an analyst at JPMorgan, said there is “a lot of gas in the tank” to rebound in inflows now the key economic uncertainty that weighs down emerging markets “raised”.
The threat of recession has receded. Data released on Thursday showed that the US economy grew more than expected in the final quarter of 2022, expanding at an annual rate of 2.9 percent, while jobless claims remained low.
China’s decision to scrap its zero-Covid policy also had a big impact. Inflows into the country were $800 million of the $1.1 billion a day for all emerging markets, IIF data showed, while other developing countries benefited from the knock-on effect of Beijing’s move.
Emerging market assets were further helped by investor expectations that developing countries will outperform advanced economies this year. JPMorgan expects gross domestic product in emerging markets to grow 1.4 percentage points above the rate of advanced economies in 2023, from zero in the second half of 2022.
Shares in the benchmark MSCI Emerging Markets index have risen nearly 25 percent since lows in late October. A rise of more than 20 percent from the current low is considered a bull market.
Despite a strong start to 2023, some investors and analysts warn that the level of inflows is not sustainable.
Paul Greer, portfolio manager for EM debt at Fidelity International, said much of the rally in EM assets is also behind us.
“First and second quarter [of 2023] will see an increase in China, there is no doubt about it, “he said. “But a lot of it is now priced by the market. . . We may have seen the bulk of the rally in this cycle.
Greer said the rally was partly explained by investors returning to EM assets after drastically reducing their exposure over the past decade, and particularly over the last three quarters of the year.
Many previously emerging economies have struggled to generate rapid growth rates following the 2008-09 financial crisis, and have been hit hard by rising global inflation and the US dollar over 2022.
Greer added that despite the recent rebound, investors are not optimistic about future growth in emerging markets. Rising debt levels, greater fiscal strain across the developing world and increasingly negative demographic impacts will dampen growth potential, he said.
“It’s very difficult in emerging markets like it was before Covid,” he said.