Macroscope | Money being driven into higher-yielding emerging markets – but have they peaked in value?
Developing economies are being bolstered by a remarkable calm in global markets. The Vix index, Wall St’s so-called ‘fear gauge’ has fallen to its lowest level since December 1993
Jeffrey Gundlach, an influential bond investor, has proved prescient in his predictions of late.
Exactly a year ago, the head of DoubleLine Capital told attendees at the annual Sohn Investment Conference in New York, the premier event for the hedge fund industry, that they should prepare for a Donald Trump presidency.
Last month, Gundlach warned that the so-called “reflation trade” – a repositioning of investors’ portfolios based on expectations of faster growth and inflation – would continue to lose momentum as the US economy slows. Disappointing first-quarter gross domestic product data and a marked decline in inflation expectations suggest he may once again be proved right.
Over the past year emerging-market equities have risen a whopping 24pc rise in US dollar terms, while, net inflows into emerging-market bond and equity funds this year have surged to nearly US$60b, exceeding the US$44b for the whole of 2016
Gundlach’s latest recommendation, presented on Monday at this year’s Sohn conference, is to buy a popular emerging-market exchange-traded fund – index-tracking funds that can be traded on exchanges just like a stock – called the iShares Emerging Markets ETF, which has already returned 15 per cent this year.
Yet what is striking is that he is taking a bullish bet on emerging markets – Gundlach also advises investors to buy the debt of developing economies – while also anticipating a further fall in oil prices, usually a reason to steer clear from the asset class.
Gundlach’s evident enthusiasm for emerging markets in the face of significant risks confronting developing nations – the uncertain fallout from China’s efforts to tame its credit boom, the strain that the clampdown is already exerting on commodity markets and, just as importantly, the threats posed by both US trade and monetary policy – is indicative of both the resilience of the asset class and the appeal of higher-yielding assets in what is likely to remain a low-interest-rate environment for a considerable period of time.
Over the past year, which has seen Britain vote to leave the European Union and Trump elected US president, emerging-market equities have risen a whopping 24 per cent rise in US dollar terms.
