Will flows trickle into Japan as emerging market currency fears loom once again?
Scrutinizing flows around the world brings the focus back to the ongoing discussion about a possible looming US rate hike. Our overarching theme of cautious optimism in the US economy and equity markets is also significant. Why? Take a look at the strong inflows into the Vanguard’s FTSE Developed Markets ETF (VEA), which notably excludes any country exposure to the United States. Instead, VEA weighs Japanese equities at almost 23%. Investing in the ETF expresses a view on a stronger US dollar fueled by rising rates in the United States. These higher rates would weaken the Japanese yen and boost Japanese exporters.
We saw the largest outflows in the iShares MSCI Emerging Markets ETF (EEM). The “Fed Factor” weakened emerging market currencies and sparked worries in countries like Brazil (EWZ) and India (EPI). Consequently, investors were reminded once again of the 2013 “taper tantrum” that hit EEM especially hard.