BlackRock ponders why rate rise boosted EM

Emerging_markets_newspaperEmerging markets was the top traded iShares ETF in European markets on March 16 – a fact seen as an anomaly given the Federal Reserve interest rate rise.

The iShares MSCI EM Ucits ETF in US dollars saw volume of over $125 million (€116 million), defying expectations that the rate rise would negatively affect emerging market equities.

Wei Li, regional head of iShares investment strategy at BlackRock, said: “We would expect that following a Fed rate hike, rate-sensitive exposures like emerging markets would see a decline, but this was not the case. Surprisingly, EM [emerging market] equities outperformed the broad equity market in yesterday’s trading session.”

Li said the reason for this may be that while markets had priced in the rate rise, the ‘dot plot’, which indicates that two more hikes are expected for the rest of the year, remained unchanged.

“This was read by the market as dovish, given how far the markets had already priced in the rate rise.”

BlackRock has a positive view on emerging market equities, supported by a better growth picture and still attractive valuations.

“The Fed’s rhetoric further boosts the investment case,” said Li.

The ETF traded 627% more than its average daily volume.

Patrick Mattar, of iShares capital markets, said March 16 flow data supported observations that exposures that historically would have suffered after a rate hike, actually received inflows.

He noted that since the start of the year, global flows had picked up in both emerging market fixed income and equity. But he said the true picture was that European investors had been buying emerging market debt and selling emerging market equities for most of the year.

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