Emerging market debt was the best-selling asset class for the month, seeing €4.5bn (£3.9bn, $4.9bn) in net inflows. This was the highest amount since September. And the Fed rate hike in March hasn’t seemed to trigger a reversal.
Quite the contrary, flows received another boost immediately after the Fed announced its rate hike, according to the Institute of International Finance (IIF).
“In the week following the rate hike [on 22 March], $4.5bn flowed into debt markets. While there are other factors adding to EM strength, the main driver behind these inflows has been the softer expectations of future rate hikes in the aftermath of the dovish tone struck by Janet Yellen at the press conference,” said Scott Farnham, senior research analyst at the IIF.
Risks abound
The question is, however, how long this emerging market debt surge is going to last for. “Increased market volatility at the start of this week as a result of headwinds to the new US administration’s policy agenda could weigh on EM flows going forward if it becomes a broader risk-off environment,” said Farnham.
Increased market volatility at the start of this week as a result of headwinds to the new US administration’s policy agenda could weigh on EM flows going forward" - Scott Farnham
Source: Morningstar
Investors should also keep in mind that emerging market debt spreads have compressed a great deal over the past year, and are now below the long-term average. Investors would therefore do well to consider scaling back some risk instead of adding to it. Fixed-maturity bond funds could be a way to do this, as Omar Gadsby, head of fixed income fund selection at Credit Suisse, suggested recently.
Emerging market equities, meanwhile, also profited from improving sentiment. After three months of consecutive net outflows following Donald Trump’s election as US president, the asset class saw €2.1bn in net inflows with, as usual, global EM funds taking in the bulk of this money.
US and European equity flows, however, went the other way, suffering net outflows of €1.3bn and €1.9bn respectively. This means the ‘Trump surge’ in inflows that took off in November has halted, at least temporarily.
