Fund flows into emerging markets at three-year high

Sept 26, 2016 (LBO) – After cash outflows over the last few years, money flowing back into emerging markets has hit a three-year high.

Investors have chanelled more than 9 billion dollars into emerging market funds and the benchmark MSCI emerging market fund is up nearly 15 percent, CNBC reported.

In a recent note to clients, Deutsche Bank’s chief global strategist Binky Chadha said that “over the medium term, we see substantial scope for further emerging market inflows, aided by a continued rotation out of European equities.”

Despite turmoil in places such as Argentina, Brazil and swaths of the Middle East and Africa, foreign investment in a number of developing economies has quickened this year — which is also helping to feed government spending.

Two visible trends are bolstering the enthusiasm of major banks that are looking beyond the shores of Europe and the U.S. for opportunities to manage weath, Jose Rasco, chief investment strategist with HSBC Private Bank Americas, said.

“First is the continued development and expansion of a middle class in many countries, which previously were mired in the low income strata a few years ago,” he said. About 545 million people are middle class in Asia, according to recent data from Ernst & Young, which estimates three billion people will move into the middle class by 2030 — most of them in emerging markets.

Additionally, “many countries have expanded their regulatory reform process, which has led to increased involvement in global asset markets.” Even as global growth remains a struggle, “projections continue to suggest that wealth creation should remain vibrant in the emerging market world,” he said.

Clients with high net worth and the resources to take on risk are continuing to search for yield and growth, both of which have been all but nonexistent in advanced economies. This, Rasco explains, should continue to be more readily available in the world of emerging markets.

“The emerging market world suffered in the past few years as the U.S. dollar’s strength sent emerging market currencies and commodity prices tumbling,” he told CNBC. “Therefore the potential of a flat to falling dollar offers hope to investors that emerging markets may once again provide solid potential returns.”

A recent survey by Credit Suisse described key regions such as Saudi Arabia, India and China as among the most “robust” of the emerging sector, which may bode well for major banks.

“In the long-term, emerging markets continue to provide superior growth prospects, good demographics and increasing use of modern technologies, which should boost productivity,” he added.