With the continuing slowdown in the economic growth of China, combined with a pullback in stock prices in India and US monetary policy hanging over emerging markets, many RIA’s are seeing amazing success with moving sizable chunks of client portfolios from bonds to exchanges with funds tracking stocks in Europe, China, and India.
Investors this year have poured $16.3 billion into both mutual funds and ETFs focusing on tracking emerging market stocks and bonds, as well as those following China and India specifically.
On paper, these investors are finding bonds with bigger yields than similar counterparts in the developed world. Investors are also finding stocks in emerging markets that beat the 3.4% that the S&P 500 delivers so far this year—a sad figure compared with the bull market that regularly posted yearly gains topping 15%.
Emerging market diversified funds are up—on average 7% as of Mid-May. Also, emerging market bonds have paid an 81-basis-point premium over intermediate term bond oriented funds that are favored by large retail investors.
This is due to the continuing low US investment grade yields…which have driven investors to seek better yields in other markets—specifically, emerging markets that can serve that purpose for wealth management advisor’s clients.
Economic growth in India now surpasses growth in China even though professional investors feel it’s an inconsistent market regarding the short-term prospects of China- the world’s second-largest economy. The SSEC (Shanghai Stock Exchange Composite) returned an incredible 114% over 2014.
Classic speculative bubble? Sure. But that bubble has been fueled by the easing of financial policy in China. The country has cut interest rates three times in the last two fiscal quarters. However, if there’s an uptick in US economic growth, the Reserve may be forced to aggressively raise rates that could cause problems for emerging markets. Easy going monetary policy in the States is viewed as fueling emerging markets that are dependent on foreign investment.
Continuing low US investment-grade yields have driven investors to seek better-yielding investments in other countries—emerging markets can serve that demand with opportunities for investors. This gives The Fed a lot of power in driving the next two fiscal quarters’ outlook for these emerging markets/ stocks and bonds if and when they raise rates.
Take caution, however, as analysts are warning investors that the impact of an aggressive effort by the Reserve to raise rates could impact different emerging markets in various ways—Brazil, Russia, and Mexico are among the countries that are either more or less dependent on factors like exports, the commodity market, and state-controlled enterprises.