Emerging-Market ETF Rush Loses Steam as Investors Question Rally

LAGOS (Capital Markets in Africa) – Investors added money to emerging-market exchange-traded funds at the slowest pace this year last week, another sign that the optimism from the start of 2019 is wearing thin.

Inflows into U.S.-listed funds that invest across developing nations as well as those that target specific countries totaled $313.1 million in the five days through Feb. 15, a fraction of the $3.97 billion inflow in the previous week, according to data compiled by Bloomberg. It was the smallest weekly inflow since Dec. 28.

Investors are turning cautious after emerging-market stocks posted their biggest monthly rally since 2016 in January. Stocks have now declined for the past two weeks, paring yearly gains of as much as 9 percent, as the price-to-earnings ratio climbed above its 10-year average. Currencies also gave up some of the year-to-date gains, pressured by a stronger dollar.

This is “a natural reaction to a very strong start to 2019,” said Hari Hariharan, chief executive officer at NWI Management in New York. There are “concerns that the dollar is not doing what it is supposed to do and has not weakened as expected, plus idiosyncratic stories like India and Mexico.”

While inflows slowed, last week still represented the 18th consecutive week in which investors have added money to emerging-market bond and stock ETFs. About $30.6 billion flowed into the assets in those 18 weeks, exceeding the total of almost $28 billion for all of last year.

The strong dollar, which hasn’t weakened on expectations the Federal Reserve will pause rate hikes, and the prospect of a slowdown in global growth may now cap any further gains in emerging markets.

“A lot of managers were very relieved with the performance of EM in January after a mostly disastrous December,” said Roger Horn, a senior emerging-markets strategist at SMBC Nikko Securities America in New York. “For now they’re probably trying to get a sense for where the rest of the year is heading.”

Following are tables detailing net flows for emerging-market ETFs in U.S. dollars. The data include the holdings-weighted allocations from multi-country funds, as well as country-specific funds (figures in U.S. dollar millions unless otherwise stated):

Source: Bloomberg Business News