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Why Emerging Market Equities Attract Higher Capital Flows

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Emerging market equities attract flows

Emerging markets (EEM) attracted overall positive cash flows for the week ending April 2, 2015. Both the US (SPY) and EU equities (EFA) witnessed net outflows for the same period. Investments in emerging markets witnessed increased allocation by a modest 7% over the past three years.

The investments in emerging markets form ~12% of the total investments across the globe through mutual funds and ETFs. In 2015, nations that import oil (USO) will continue to benefit from lower prices. As a result, they will attract higher flows.

The major economies that attracted funds in the past week include China, South Korea, India, Brazil, Russia, and Taiwan.

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Reforms are key

The two major economies in the emerging world, China and India, are basing their next decade growth on the structural reforms. China is planning to make its currency robust. It plans to develop the domestic market and the service industry to propel the growth for the next phase. The Chinese economy showed some signs of improvement in the past week. A few indicators include the PMI (purchasing managers’ index) for services being above 52, appreciation in the yuan, and monetary policy action.

In contrast, India is expected to be the fastest growing economy in the next couple of years. It will surpass China. The government will be under the leadership of Narendra Modi. Modi has a promising track record with more than a decade of service. The nation saw its forex reserves reach $340 billion. It increased by $50 billion since Modi announced his top position in the country. Inflation receded, coal mine auctions were successful, and the government announced a business-friendly budget.

Asset managers that will likely be affected by the performance of emerging market equities include BlackRock (BLK), Fidelity Investments, Goldman Sachs (GS), Franklin Resources (BEN), and Blackstone (BX).

For the latest updates, visit Market Realist’s Financials page.

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