(Adds graphics and updates volatility in paragraph 11)
Until April Joyner
NEW YORK, February 14 (Reuters). Investors are returning to emerging markets, though concerns about the impact of the corona virus on global economic growth have clouded the prospects for the boom-and-bust asset class.
Lipper said nearly two $ 730 million in emerging market exchange traded funds (ETFs) returned to emerging markets last week after two consecutive outflows associated with a sharp drop in developing country stocks and currencies.
The MSCI Emerging Markets Index, which measures equity performance, recovered 4% from its February low, but remains year-on-year. Another index that measures emerging market currency performance was still significantly lower, reflecting the decline in a number of currencies from Asia to Latin America.
As of Friday, the coronavirus infected 63,581 people and killed 1,380. Nevertheless, investors have become more hopeful that the economic damage will be limited.
Before the outbreak, emerging market stocks had risen steadily since early December, as analysts predicted global economic growth would accelerate again and the US and China agreed to a phase 1 trade agreement. Chinese stocks make up around a third of the weighting in the MSCI Emerging Markets Index.
Emerging market ETFs have had a steady flow of money since late October and no monthly outflows, according to Lipper data.
“The ratings are really convincing and we saw signs of an economic recovery,” said Robert Phipps, director at Per Stirling Capital Management. “As soon as the corona virus stops, I think it will become the main trend again.”
Phipps, who did not hold emerging market stocks, added them so that they now make up about 6% of his portfolio. A weaker dollar would likely force him to strengthen that position, he said.
Should the currency fall, it will be easier for countries that have taken out loans in dollars to service their debts.
Other financial institutions, including BlackRock, JPMorgan and UBS Global Wealth Management, are also confident about the prospects for emerging markets in 2020, although the asset class has underperformed US stocks for more than a decade.
Emerging market stocks have been largely more resilient lately because they have been weakening for so long, said Michael Purves, CEO of Tallbacken Capital Advisors.
“There is no reason to sell them because they are already massively under-owned,” he said.
The option activity also indicates the resilience of investors. The gap between the Cboe Emerging Markets ETF Volatility Index and the Cboe Volatility Index, which is seen as an indicator of risk aversion among investors, was 3.6 points on Friday afternoon. This is comparable to a 7.25 point gap in May 2019, when trade tensions between the United States and China were near their peak.
The economic impact of the coronavirus outbreak is unknown. Some analysts have estimated that China’s annual gross domestic product growth could drop to 4% to 5%, compared to the 6% annual growth previously estimated by the Chinese government.
However, some investors believe that the growth lag will be largely contained by the first quarter, which would give China’s economy room to catch up later this year.
“It’s a relatively short-term factor,” said Jim Besaw, GenTrust’s chief investment officer. “We probably won’t talk about it in April and May.”
(Reporting by April Joyner; editing by Ira Iosebashvili, David Gregorio and Dan Grebler)