Cash trickles back to emerging markets, faces growth challenge

Investors are starting to move back in to emerging stocks and bonds after a long hiatus, data from fund tracker EPFR shows, but the economic slowdown gripping the developing world is likely to constrain market rallies. Emerging stock and bond funds saw their first weekly inflows after more than $50 billion fled in the first three months of 2014, with equities snapping a 22-week losing streak, Boston-based EPFR Global said.
The company, which tracks funds with $23 trillion in assets, released details of first quarter flows late on Thursday, showing that all emerging equity fund categories had shed $41 billion, following $26.7 billion losses in 2013.
But these funds received $2.5 billion in the week to April 2, with 95 percent of this taken in by exchange-traded funds (ETFs), EPFR said, adding that "there were signs of a thaw".
China, India, Russia and Brazil enjoyed the biggest inflows.
Emerging debt funds received just over $1 billion in the past week, EPFR said, noting that the funds had posted outflows in 12 of the 13 weeks in the first quarter, when losses amounted to $17.2 billion.
Banks and investors have started buying back into the emerging market story, noting that sector valuations now are cheap enough to compensate for economic weakness and political risks.
Barclays, Citi, HSBC, Morgan Stanley and Societe Generale are among banks advising clients to buy back in, albeit selectively, with emerging equity valuation discounts having moved to almost record levels versus their developed peers.
"When pessimism about an asset class is this strong, usually that is a compelling opportunity to buy at an attractive price if you have a long-term time horizon," said Austin Forey, investment manager of J. P Morgan Emerging Markets Trust.
"There is always the potential for downside but we are in a historically cheap zone."
Emerging equities, at one point down almost 10 percent on the year, are now trading near flat. Year-to-date returns on dollar bonds issued by developing countries, at 3.5 percent, are higher than US Treasuries.
The change in sentiment contrasts with the findings of an HSBC survey that showed business activity in emerging markets fell for the fourth straight month in March, with output contracting in three of the four biggest developing economies.