U.S. Asset Managers Under-allocated to Emerging Markets Despite Outperformance

U.S. stock investors pumped fresh funds into emerging markets after recent outperformance. However, they remain under-allocated by a key measure, as a combination of "home bias" and lingering concern about volatility have restrained client interest.

In 2017, they increased allocation by a near $52 billion in the first quarter. U.S. domiciled active managers have just 5 percent of assets under management allocated to emerging market equities, according to research data from eVestment. 

With global economic growth trends favoring the fast-growth asset class, investors will need to move into emerging markets to continue reaching gains above 5 percent in bond and equity portfolios, said Krishna Memani, chief investment officer at OppenheimerFunds. 

"In a growth-short world, emerging markets are going to be the primary source of growth for the forseeable future," Memani said. "That is decades." 

Read more at Reuters.

Brazil Stocks Edge Up Ahead of Labor Reform Vote

With lawmakers discussing and voting on President Michel Tener's plans to revamp labor regulations during an ongoing political crisis, traders hedged their bets on the outcome by edging up Brazilian stocks. 

Investors see the planned labor reform as critical to boosting long-term economic growth. It is expected to clear a final Senate vote later. The vote, according to traders, will act as a gauge of lawmakers' support for Tener's reform platform. 

Brazil's Bovespa stock index rose 0.4 percent. Rising prices of crude and iron ore lifted shares of state-controlled oil company Petróleo Brasileiro SA and miner Vale SA. Embraer SA also advanced while the Brazilian real teetered in response.

Traders and lawmakers alike are looking to U.S. economic indicators and Latin American currencies for clues as the legislation and economic situation progress.

Read more at Reuters. 

Dollar Doldrums Drive Traders to Emerging-Market Local Bonds

Chances are high that the U.S. dollar will drop even further this year. As a result, local currency emerging-market bonds are seeing a spike in their appeal. 

With reports of bearish wagers on the dollar, experiencing its worst start to a year since 2006, the outlook is not optimistic. Coupled with higher interest rates in developing nations, record inflows to emerging market-funds were rampant during the first half of 2017. 


The tide may shift, however, as returns for local currency securities are more than four percentage points higher, according to Morgan Stanley analysts. 

The chances of a pullback are clearly higher for hard-currency debt, Morgan Stanley analysts led by Simon Waever said in a June 30 note. “In local currency, technicals look more positive, as cumulative flows into local debt have only recovered around half of the outflows seen since 2013.”

Recent selloffs are due to central banks in developed economies signalling monetary policy tightening. Real rates, however, are expected to remain high to justify risk for investors, especially with inflation slowing. 

Read more at Bloomberg.

How Does China Impact Emerging Market Investing?

Due to China's status as the largest economy in Asia, how much does the Chinese economy impact investing in the region? 

"You have to consider digital disruption with every investment you make. China does have some of the companies that are really at the forefront of that, especially Alibaba," Gary Greenberg, Hermes Global Emerging Markets Fund Manager, remarked. 

"Alibaba is expanding outside of China. So, in that sense, yes, there is that factor."

That factor is influence. He says that many companies in Asian markets have gone global, and it's a sign of an interconnected world. 

When asked about economic health in Asia and China's role, Greenberg mentions a ripple effect with neighboring countries like Korea and Taiwan. This means a stake in the resulting shock waves from Chinese decisions. 

While Greenberg does believe that China's economy will continuously slow, there is no cause for alarm. 

"China . . . [is] such a large economy that even slow growth for a $10 trillion economy is substantial."

Read more at Morningstar.