Money has poured into emerging markets this year, with funds dedicated to the asset class enjoying their best start to a year since 2006 amid continued investor wariness over developed markets.
Emerging market equity funds, which fell out of favour for much of last year, attracted $3.5bn in the week ending February 1, the most in almost a year, taking the total inflows this year to $11.3bn, according to EPFR Global, a data provider.
Emerging market bond funds saw inflows of $1.2bn last week, the most since March last year. Buoyed by the renewed surge in capital inflows, emerging market currencies have also enjoyed a strong start to the year.
“The appetite towards emerging markets has been so far remarkable,” strategists at Société Générale said in a recent note. “To a large extent, it has reflected some [European] debt crisis fatigue, and the fact that investors have been keen to put risk back on to the table.”
As a result, the FTSE All-World Emerging index has gained more than 15 per cent so far this year, to its highest level since early August. The global FTSE index has only gained 8.4 per cent so far in 2012.
Emerging market borrowing costs have also tumbled thanks to renewed investor interest. The yield of JPMorgan’s EMBI index of developing country debt has fallen to 5.5 per cent, the lowest since August.
The strength of the rally has caused some analysts to question whether it can be maintained.
“While we entered into 2012 with a constructive tone, the magnitude, intensity and the breadth of the EM asset rally naturally raises the question whether the market has rallied too far, too fast,” Barclays Capital analysts said in a research note.
Strategists at Société Générale said: “Global emerging markets have now reached an important stage, whereby investors need to reassess their outlook following a spectacular start to the year.”
Emerging markets remain at risk from a resurgence of Europe’s sovereign debt crisis, and any faltering of economic growth in the US and China, still important drivers of developing economies.
Nonetheless, investors and strategists point out that emerging markets enjoy better economic fundamentals than the developed world, which faces many years of deleveraging. Moreover, despite the recently strong performance of emerging market stocks and bonds, many remain attractively valued, strategists argue.
“The rally has been intense but it has only partly reversed 2011 losses, particularly in emerging market cash credit, where the very heavy supply in January has likely held back performance,” Barclays Capital analysts said.
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