Emerging markets: the money keeps rolling in…
Research from Commerzbank Corporates & Markets indicates inflows into emerging markets funds have soared since the beginning of the year.
This holds true for fixed income funds, but is particularly the case for equity mandates. The reason for this development is that EM assets are cheap and the fundamental outlook for the asset class is positive – both factors are appreciated by investors.
Poor liquidity in the secondary market makes primary market issues an attractive way to increase exposure to EM fixed income. Consequently, the fast flow of bond mandates keeps on being easily absorbed.
The exogenous environment is increasingly supportive: recovery in core markets and signs of strengthening global manufacturing is fuelling a risk-on rally. Latest CEE PMIs are reporting a broad uptick trend with Poland in particular showing a powerful jump.
The IMF recently revised down its global growth forecast for this year to 3.3% and expects a rebound in 2013 to 3.9%. The main drivers for global growth remain emerging markets economies, where this year’s growth is expected to be 5.4%, versus 1.2% in developed markets.
Another supporting factor comes from across the Atlantic: the US Federal Reserve expects the federal funds rate to remain at exceptionally low levels at least through to late 2014, i.e. rock-bottom US interest rates should stay with us for another three years.
In addition to this, a third round of quantitative easing remains a possible option later in 2012, implying that the tailwind for EM assets should persist for the foreseeable future.
To be watched closely are the ongoing negotiations between IIF and the Greek government regarding PSI in a “voluntarily” Greek debt exchange. Deadlines have been pushed back, but we expect the parties finally to come up with an agreement before the critical date of 20 March, where Greece has to meet bond repayments of €14.4bn.
If a PSI deal cannot be fixed by then, the next tranche of Greece’s support package will not be disbursed and the country will be pushed into outright default. In such a scenario CEE assets would correct sharply, reflecting contagion fears via the regional integrated financial sector.