Investors regain taste for EMs, but is it wise?

arrow graph upNet inflows into emerging market equity funds hit their highest weekly level in over a year, signalling a return in appetite for this previously unpopular asset class.

According to the data from research firm EPFR Global, exchange-traded funds (ETFs) dominated the inflows, accounting for nine of the top ten emerging market equity funds by inflows in the week ending April 9.

The gains were all due to institutional commitments, with retail investors redeeming money on a net basis during the week.

The inflows have been supported by confident predictions from firms such as JP Morgan Asset Management, which suggests an investment in emerging market assets at today's historically low price-to-earnings ratios could yield double-digit returns in the next 12 months.

“Investors focused on long-term fundamentals will find this presents an attractive entry point,” says Richard Titherington, chief investment officer, emerging markets equities, JP Morgan Asset Management.

Yet there is still scepticism among some analysts: “From a valuation perspective, EM may be close to historically attractive P/E levels and international investors currently seem keen to get back in, but the quality of the ‘E’ worries us,” reads a report by researcher CrossBorder Capital.

Among the concerns outlined in the report is the worry that recent infrastructure spending in China is a case of “phantom growth”, since much of the new developments may not represent a productive investment in the medium term.

“For EM to grow again in a sustainable fashion, we need to see further economic reforms; better corporate management; better evidence that investors have fully discounted China-risks and, in all probability, a significant currency devaluation,” says the report.

Some asset managers share the pessimistic view. Paul Niven, head of multi-asset investment at F&C Investments, says he is underweight emerging market equities.

“One of the biggest concerns for investors has been China,” he says. “Worries about the growth outlook are compounding existing concerns about emerging markets in general.”

However, Niven says he is overweight emerging market debt.

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