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Investors are falling back in love with emerging markets to a degree that sounds alarmingly alarming in some forecasters, who have warned against not joining the group at this point.
"Now, everyone seems to like emerging markets," wrote T.J. Thornton, head of US product management at Jefferies, in a weekend note.
And why not? Thornton noted that "emerging markets have underperformed for about 8 years, they are several times cheaper than the S & P, China may be in trouble and it looks like we are heading towards a successful trade agreement" .
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'Logical call'
This makes long money a "logical call", he said, but noted that, despite the apparent progress on the trade front, the European currency has underperformed the US so far this year , "perhaps in part because his preference is a consensus."
The iShares MSCI Emerging Markets Exchange Traded Fund
EEM + 0.89%
up 8.1% year-to-date, up 11% for the SPDR S & P 500 ETF Trust
SPY, + 0.20%
who follows the S & P
SPX, + 0.18%
Fund managers have also expressed concern that emerging market bets are a bit of a one-way street. The Bank of America's February survey of money managers, Merrill Lynch, found that emerging trade was the most congested trade in global financial markets.
Measure flow
Analysts at Deutsche Bank said on Tuesday that the cumulative inflows of $ 43 billion into emerging market equity funds since October are approaching the strongest five months since 2010, with flows directed to funds. rather than those with regional or national mandates.
Thornton took note of EPFR data on cash flow and found that flows to emerging markets minus flows to the US, via the 8-week moving average, were at the highest level since about six years (see graph below).
Jefferies
When flows between EEM and SPY favor EEM of 0.2% or more of assets under management, emerging markets have tended to underperform, he said. The spread recently reached this level on December 5th.
In the previous seven times where the gap has reached this level, EEM has underperformed SPY by more than 200 basis points, or 2 percentage points on average over the next three months and about 8 percentage points over the next six months, Thornton wrote.
Reason for hesitating?
This could give pause to those who would like to switch to emerging markets at this stage, he said, adding that expectations of outperformance in emerging markets would also be inconsistent with investor aversion to US cyclical groups. , some of them being likely to benefit from the same factors likely to be expected to benefit EM.
Emerging market bulls are looking to strengthen, citing in part the Federal Reserve's dovish reversal last month, which was accompanied by a weaker US dollar and weaker US Treasury yields, two factors generally detrimental to the asset class. The hopes of a trade deal between the United States and China and expectations that the effects of stimulus measures by Chinese policymakers will soon begin to appear more clearly in the data are also part of the bullish case.
Analysts at Franklin Templeton have argued that with emerging markets, trading at a significantly lower price than developed markets should remain an attractive investment opportunity. At the end of January, the MSCI EM Index
891,800, + 0.59%
traded at a forward price / earnings ratio, or P / E, of 11.4 and a price-to-book ratio, or P / BV, of 1.6, while the developed market, represented by the index MSCI World, tracks – and the performance of mid-cap stocks in 23 developed market countries, with a P / E futures of 14.5 and a P / BV of 2.3.
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