Bigger investors pouring money into emerging markets

Large investors are starting to funnel more money into emerging markets, indicating a potential structural shift in investment strategies, according to a seasoned economist from Bank of America. David Hauner, the head of Global Emerging Markets Fixed Income Strategy at Bank of America, revealed to Reuters that significant global fixed income funds, which possess greater financial resources than those specifically dedicated to emerging markets, are making substantial investments in key regions.

Countries experiencing positive growth or undergoing reforms, such as Mexico, Brazil, Turkey, India, and Poland, are the primary beneficiaries. Additionally, short-term investments in Egypt and Nigeria have gained popularity. Hauner suggests this marks the beginning of a structural change, with investors favoring specific country exposures over index products that bundle various emerging market assets.

"You’re seeing outflows from dedicated funds while simultaneously observing crossover investments. This is unprecedented," Hauner remarked. These investment trends indicate that investors are rewarding countries implementing difficult reforms, like currency devaluations and subsidy cuts, aimed at strengthening state finances.

This activity contrasts with widely-followed EPFR data, which reports about $5 billion in outflows from emerging market debt funds, excluding China, year to date. Hauner noted that no single data source captures the entirety of these investments. EPFR data typically reflects exchange-traded and mutual funds comprising a set mix of emerging markets, often dominated by China.

As the performance of developing countries diverges—with China lagging and typically riskier nations like Egypt rising due to capital influxes from the UAE and the International Monetary Fund—a broader range of investors are seeking opportunities in select emerging markets rather than funds with a predetermined asset mix.

Alejandro Arevalo, head of emerging market debt at Jupiter Asset Management, noted that the unexpectedly strong performance of economies like Mexico, India, and Vietnam has made them "darlings of investors." He highlighted that these countries have excelled in combating inflation and positioning themselves to benefit from U.S.-China trade tensions.

Arevalo expects traditional investment flows to soon reflect this shift. Supporting this view, Hauner pointed to "puzzle pieces" that illustrate current cash flows, such as figures from the Institute of International Finance (IIF), which are based on balance of payments data. For instance, IIF data showed that foreigners added about $32.7 billion to their emerging market portfolios in March, marking the fifth consecutive month of overall foreign net inflows to emerging markets.