Investors Turn to Emerging markets Amid Cheaper Valuations
Heightened volatility and premium valuations in developed nations have made emerging markets attractive investment prospects. The premium valuations that have come to play behind one of the strongest bull runs in US equity are forcing investors to pursue high-risk reward opportunities in emerging markets. Total inflows into exchange traded funds that track developing nations have already risen to highs of $10 billion for the year at the back of the $1.7 trillion equity rally and gains on the bond markets.
Emerging Markets Inflows
Immediate data indicate that net deposits into ETFs that invest in developing nations increased to $766.1 million for the week ended November 24. The increase affirms strong interest in emerging equity markets, which are again on a roll after coming under pressure at the height of the COVID-19 pandemic. However it was a slight drop from the previous weeks inflows
India has emerged as one of the most sought after emerging markets, judging by the capital inflows into ETFs with exposure to the country. Attractive demographics, unique supply and demand dynamics, and a stable democracy have made it attractive for investors eyeing exposure in emerging markets. In addition, investors are becoming increasingly confident.
Emerging markets and bond markets have received significant inflows after coming under immense pressure last year. The softening of inflationary pressures has seen demand for market risk increase significantly. In addition, emerging market valuations are highly attractive compared to valuations in developed nations, especially the US.
With the S&P 500 up by about 18% and tech-heavy Nasdaq up by more than 40% for the year, there are growing concerns that US equities are overstretched on the valuations front. Consequently, investors increasingly turn their attention to emerging markets with attractive valuations as they bounce back from last year’s slowdown and COVID-19-engineered slowdown.
Analysts expect cheaper valuations in emerging markets, a weakening dollar, and a peaking of US Federal rate pricing to bolster sentiment on emerging market assets. Korea and Taiwan are other attractive markets owing to the booming semiconductor and hardware technology business.
China Slowdown
On the other hand, investors are avoiding China as it remains a big risk amid an equity market that is increasingly being driven by earnings. The world’s second-largest economy faces several problems, the key being slow growth and a property market in disarray. The country’s recovery from the pandemic has slowed in recent months, fuelled by turmoil in the property market. Slowing demand for the country’s manufactured goods as global growth also slows continues to pose significant risks.
Amid increased focus on emerging markets, there is also uncertainty about whether the rally is sustainable. EM markets can be highly volatile when hit with headwinds. On the other hand, developed markets like the US have some stability. Equities are looking increasingly attractive, with the US appearing to have peaked on monetary policy tightening. Following a deep pullback in Q3, the S&P 500 and the Nasdaq have rebounded, recouping all losses and affirming renewed interest in US equities.
