In the spirit of Halloween, I wanted to tell you a little story about how when something may seem scary at first, a little background knowledge can go a long way. I remember visiting haunted houses as a kid and feeling especially scared when, on one occasion, the grim reaper appeared without warning from behind a darkened corner. The following year, the same reaper darted out of hiding at the same corner, and I wasn’t scared anymore because 1) I’d seen it before and 2) I figured out it was just a guy in a costume. I felt more confident because I knew what to expect, no longer possessing a fear of the unknown.
While stepping outside of your comfort zone by trying something new can be scary, it can often be a good thing. My colleague Heidi Richardson recently discussed some of the potential applications for emerging markets (EM) in a diversified portfolio. Concerns over global growth and rising interest rates have pushed many out of this space, but our research indicates that there are pockets within the EM landscape that have been growing. Much like knowing which houses give out the best candy on Halloween night, it seems there are a few good opportunities out there if you know where to look.
What Investors are Avoiding
The latest industry data show that EM equity is headed for a third straight year of outflows globally, having shed $27 billion year-to-date. Market volatility in Q3 accelerated this trend. Country fund outflows of $21 billion are focused in a group of 10 locally-listed China A Shares funds, due to concerns over valuations and the impact of the Shanghai Hong Kong Stock Connect program on ETFs. Latin American countries with less of a buffer against a global downturn, such as Mexico and Brazil, have also been a drag on exchange traded fund (ETF) flows. With all the changes in global growth uncertainties, interest rates may be spooky to investors, and we’re seeing it reflected in these select areas.
Where Investors are Going
While investors are wary of some EM exposures, we have found there are pockets where investors are putting their money—both in basic broad funds along with specific countries. In October, flows stabilized along with the MSCI EM Index. Specifically, China H Shares funds are seeing inflows, as are other country funds in Asia. The reason behind this: confidence in foreign reserves and the potential for long-term economic reform.
Take India for example. India equity ETFs have average organic growth of 26 percent over the past three years. Prime Minister Modi’s election last May and his ambitious plans for economic reform sparked strong inflows of $5.1 billion over the last 6 quarters. Sentiment has shifted a bit since July, however, as Modi’s tax, land and labor proposals have inspired ETF redemptions of $1.3 billion in Q3 of this year, based on Bloomberg and BlackRock data. Still, inflows are net positive over the longer horizon.
India ETP Flows Over 2 Years
When it comes to EM, if you know where to go, you’ll find that some exposures can be less of a trick and more of a treat.
Amy Belew is a Managing Director and head of Global Business Intelligence for Global iShares. She writes about exchange traded fund (ETF) trends for The Blog.
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