There is something strangely reassuring about seeing festive decorations being displayed in a large London department store only a few days after the hottest September day in 60 years. With one final flourish, summer is gone. Light trading volumes and asset allocation indecision should now be replaced with assertion on the part of investors heading into the year’s final quarter.
June and July’s European fund flow data revealed considerable Brexit-induced risk aversion, with investors taking flight from broad-based pan-European and UK equity funds and flocking into Dublin-based money market vehicles. August’s European data from Thomson Reuters Lipper revealed that, although many investors are keeping their powder dry (dollar, sterling and euro-denominated money market funds collected over €14bn (£12bn) during the month), others appeared to have decided where they want to be by the year’s end.
Other than money market fund movements, the best-selling sector for Europe for August was Global Emerging Market Equity, which collected €4.6bn of net sales for the month. It was followed by Bond Global (+€3.5bn), Bond Emerging Markets in Hard Currencies (+€2.9bn), and Bond Emerging Markets in Local Currencies (+€2.2bn).
It appears, then, that after five years in the wilderness, emerging markets (EM) might finally be showing a return to favour. In Europe, Brexit has confirmed a ‘lower for longer’ interest rate environment, providing a natural feeder into riskier yield-bearing assets. The US, too, seems to be unable to provide a guaranteed upward trajectory in rates, despite expectations.
There is also now a confluence of strong performance to encourage investors. Last summer’s memory of the China ‘wobble’ and its accompanying volatility feels distant – for the first eight months of 2016 the average sterling return of funds in the IA Global Emerging Markets sector is 29 per cent, with the IA Global Emerging Markets Bond sector average standing at 26 per cent and China/Greater China 18.7 per cent over the same period. That makes the IA Sterling High Yield sector’s 9.3 per cent average return look spartan by comparison.
Chasing returns is an investment strategy likely to disappoint, and chasing the hot money into EM may be similarly inadvisable. However, it is likely that – as we head towards the end of the year – there will be further offloading of cash. Discretionary fund managers in the UK and Europe who are still cash heavy will not be able to justify significant holdings to their clients come Christmas. And where do you allocate when yield and dividends in developed markets are at a premium?
In a recent conversation with Thomson Reuters, Aberdeen Asset Management chief executive Martin Gilbert noted “sentiment [on EM] has improved considerably.” This has coincided with a 15 per cent increase in Aberdeen’s share price over the past six months and, as Gilbert noted, a material reduction in short positions on Aberdeen’s stock.
I’m not one for reading runes, but I will certainly be keeping an eye on EM fund flows in September and October. As the summer revealed, developed markets carry political risk, rates are staying low and recent risk aversion has seen large, and perhaps unsustainable, inflows into cash. Summer is over, and now decisions have to be made in time for Christmas.
