Larger investors pouring money into emerging markets are denying outflows from emerging markets

By Libby George

LONDON (Reuters) – Big-ticket investors are starting to place more cash in emerging markets as they chase returns in what could be a structural shift in how they allocate their money, a senior Bank of America economist told Reuters.

Large global fixed income funds, which have more firepower than those focused on emerging markets, are placing bets in “huge proportions” in key places, says David Hauner, head of Global Emerging Markets Fixed Income Strategy at Bank of America, to Reuters.

Countries with positive growth or reform stories, including Mexico, Brazil, Turkey, India and Poland, will receive the money. Short-term betting in Egypt and Nigeria has also become popular.

“I think this is the beginning of a structural story,” Hauner said, adding that investors wanted specific country exposures, rather than index products that bring together a range of assets from emerging markets.

“You see outflows from specific (funds) and at the same time people involved in crossover. That’s the new thing. I don’t remember this ever happening before.”

The flows indicate that investors reward certain countries when they implement reforms that are painful for citizens, such as currency devaluations and cuts in subsidies, in an attempt to shore up public finances.

They also contradict closely watched data from EPFR, which shows about $5 billion in outflows from emerging market debt funds so far this year, excluding China.

Hauner said there was no single data point that captured the investments. EPFR data reflects exchange-traded and mutual funds that include a steady mix of emerging markets, often dominated by China.

But as fortunes among developing countries unravel, with China, for example, lagging behind in terms of returns, and other generally riskier countries, such as Egypt, emerging following an influx of cash from the UAE and the International Monetary Fund, a wider range of investors will want to place money in selected emerging markets – rather than through a fund with a fixed mix of assets.

Alejandro Arevalo, head of Emerging Market Debts at Jupiter Asset Management, said the unexpectedly strong performance of economies such as Mexico, India and Vietnam has made them “investor darlings.”

“Money is flowing into these countries,” he said, adding that they had done well in the fight against inflation and had positioned themselves to benefit from trade tensions between the United States and China.

He said traditional flows are likely to reflect the shift soon.

Hauner already said there are “puzzle pieces” that illustrate current cash flows, including figures from the Institute of International Finance, that rely on balance of payments data.

For example, IIF data shows that foreigners added about $32.7 billion to their emerging market portfolios in March, a fifth straight month of total foreign net flows into emerging markets.

This year’s rally in high-yield bonds from Egypt to Pakistan, and the market’s absorption of billions in bond issues from Turkey to Ivory Coast, also lend credence to the inflows.

“It just reflects that emerging markets are (growing up) and global debt investors want their fair share of exposure,” Hauner said. “They are more stable than before. And yet they offer quite attractive returns.”

(Reporting by Libby George. Editing by Karin Strohecker and Toby Chopra)