If the flow of capital to U.S. exchange-traded funds is any indication, investors have started to favor emerging market equities over almost all other asset classes, including U.S. equities.
TheThe largest ETF buying developing country stocks received more money in the five days to Thursday than any of the more than 2,400 other funds on the U.S. stock exchanges, according to data compiled by Bloomberg. This sends the Vanguard FTSE Emerging Markets ETF towards its largest weekly entry in two years.
In contrast, the $ 324 billion SPDR S&P 500 ETF, the flagship of U.S. equities, posted outflows of more than $ 4.5 billion, the worst among its peers. Other funds investing in Nasdaq 100 index stocks, gold, silver, real estate, global bonds and inflation-linked securities all lost money. Dollar debt, which is typically the most popular segment in emerging markets, also loses against equities.
Portfolio managers from Ashmore Group Plc to JPMorgan Chase & Co. and UBS Group AG made a bullish deal for emerging market stocks in 2021 as they expect the group to be the main beneficiary of the economic rebound post-coronavirus. Asia’s relative success in containing the pandemic, vaccine breakthroughs in China, India and Russia, along with renewed demand for commodities and Joe Biden’s $ 1.9 billion stimulus package are supporting the optimism.
From December 18:Move over, bonds. It’s the turn of equities in emerging markets
Analysts have increased earnings estimates for companies in emerging markets faster than in rich countries. After a collapse in March 2020, earnings forecasts recovered a net 4% in developing countries. The projections have changed little in the United States, while they are still 11% lower in Europe.
Then there is the call for evaluation. Emerging market equities are trading at a discount of almost 29% to US equities, compared to an average of 25% over the past 15 years. For some investors, this leaves room for the rally in the benchmark MSCI Emerging Markets index to continue at least until this gap is closed.
This does not mean that the gauge can continue to rise in a context of liquidation in the United States. Any slippage in developed countries has an immediate and disproportionate impact on emerging markets. Nonetheless, the better earnings outlook and cheaper relative valuations justify outperformance beyond the short term.
The stock index was little changed for the week.
|AND F||5-day flow through Thursday (in millions of dollars)|
|Vanguard FTSE EM||1,258|
|IShares 20+ Treasury Bonds||1,048|
|iShares Core MSCI EM||969|
|IShares Core US Aggregate Bonds||-840|
|IShares U.S. Real Estate||-854|
|SPDR Gold Shares||-1 199|
|SPDR S&P 500||-4,529|
(Adds the weekly movement of stocks at the end)