Emerging Markets Regaining Confidence of ETF Investors

Emerging markets drew the largest investment flows among U.S. exchange-traded funds last week on bets developing-nation stocks will rebound after they fell to the cheapest relative to developed-nation peers since 2006.

Investors added a net $1.6 billion into ETFs focused on emerging-market equities and bonds in the five days through March 28, helping trim the outflow this year to $12 billion. Flows into the iShares MSCI Emerging Markets ETF, the second-largest of its kind, totaled $1.4 billion, the most among the almost 2,000 U.S.-based funds tracked by Bloomberg.

The MSCI Emerging Markets Index of stocks rose for a seventh consecutive day today, reducing declines for the year to 1 percent. Currencies including the Turkish lira and South African rand are erasing losses for the year after their central banks raised borrowing costs, overcoming China’s economic slowdown, the reduction of stimulus from the Federal Reserve and rising geopolitical tensions.

“The sentiment is becoming less negative at the margin for emerging-market equities,” Morgan Harting, a senior portfolio manager who helps oversee about $458 billion at AllianceBernstein Holding LP, said from New York. “At some point, valuation just starts to matter. The gap between emerging equities and developed equities had become extremely wide.”

Winning Streak

MSCI’s emerging-market stock gauge added 0.8 percent to 993.05 as of 2:04 p.m. in New York, poised for its longest stretch of gains since July. Its decline this quarter compares with a 0.7 percent gain in the gauge for developed-market stocks. It’s the fifth consecutive quarter that emerging markets trailed peers in advanced economies, matching the longest underperformance since 2011.

Emerging-market stocks trade at 10.3 times estimated earnings for the next 12 months, compared with a valuation of 15.4 times for equities from advanced economies, according to data compiled by Bloomberg. The 33 percent discount is near the biggest since 2006.

The valuation, and signs that countries including India and Indonesia have taken steps to narrow their current-account deficits, are giving investors confidence that emerging-market assets have fallen enough to reflect the economic risks.

A gauge of currency volatility fell to a two-month low today, suggesting investors are prepared as U.S. policy makers reduce stimulus by cutting monthly bond s to $55 billion, from $85 billion. Federal Reserve Chair Janet Yellen said in a speech that central bank stimulus will be needed for “some time,” easing investor concern that interest rates may rise earlier than previously forecast.

Russia, India

Russia’s Micex Index jumped 1.9 percent to a one-month high, paring its quarterly losses to 9 percent, as concern eased that tension between Russia and Ukraine would escalate.

India’s S&P BSE Sensex rose 5.7 percent this quarter to a record as the opposition Bharatiya Janata Party leads in opinion polls, sparking optimism that a new government following elections ending in May may revive the economy.

Turkey’s lira climbed 2.4 percent today, the most in six months, and erased its loss this year on speculation the victory of Prime Minister Recep Tayyip Erdogan’s party in local elections may arrest foreign capital outflows.

Emerging-market dollar-denominated government bonds returned 3.3 percent in the first three months of 2014, the best quarter since September, according to data compiled by Bloomberg. Local-currency bonds climbed 1.2 percent in dollar terms, the first quarterly gain in a year.

Fund Movement

“Emerging markets have been out of favor,” Graham Bibby, the chief executive officer at Richmond Asset Management Ltd., said on Bloomberg Television’s “On the Move.” “This is the time for some movement into that.”

Morgan Stanley said in a note today that economic growth in developing countries will disappoint investors.

“EM economies have much further to go in terms of adjustment for reforms and generating new sources of sustainable growth,” Manoj Pradhan, an economist at Morgan Stanley, wrote in a note.

Money flows to emerging-market ETFs last week were more than eight times the average of $197 million over the past 20 days, Bloomberg data show. The iShares ETF attracted the most since September, reducing the outflow this year to $7.6 billion.

The Market Vectors Emerging Markets High Yield Bond ETF, which invests in corporate bonds in developing countries, attracted $97 million last week, the most since April 2013.

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