Investors are hungry for emerging markets again.
Nearly $10 billion has rushed into emerging market debt in just the last two months.
Experts say that’s a significant turnaround — a net $103 billion bolted out of emerging market debt between 2013 and 2015, according to Bank of America Merrill Lynch research.
Money is starting to flow into emerging market stocks too as recently as last week, though not as much yet. The timing is good. The broad MSCI emerging market stock index is up 5.5% this year, well above the gains — or lack thereof — in U.S. and European markets.
Stock markets in Brazil, Argentina and Russia are up 10% or more so far this year. South Africa and Mexico’s markets are up too.
“We are in a sweet spot for emerging market assets,” says Richard Turnill, BlackRock’s Global Chief Investment Strategist.
Interest in emerging market investments is being fueled by a few key changes, experts say. In short, many of last year’s headwinds have become this year’s tailwinds.
1. Commodity prices, which drive growth in emerging markets, have risen since February after plummeting the last two years.
2. The Federal Reserve now expects to raise U.S. rates fewer times this year than previously thought. Higher rates tends to attract more money. So investors are seeking higher returns in riskier markets.
3. The strong dollar is losing momentum while emerging markets currencies are bouncing back from a sluggish 2015. A strong dollar also makes it hard to pay back debt owed in dollars.
Appetite for overseas investments really picked up last week. Argentina issued debt to the international capital markets for the first time since 2001. It sold $15 billion in debt, the biggest single issuance of debt from an emerging market country, according to Dealogic. It also sold the debt at relatively low interest rates.
Argentina had been in a 15-year legal battle with creditors until it officially paid them off on Friday. Experts say Argentina is leading the buzz for emerging market debt right now.
But they also caution that these markets still pose risks. Russia and Brazil are in the midst of dealing with major economic problems. Some commodity prices, such as oil, still remain low, albeit better than in January. And China’s slowing growth remains a top concern too.
But that doesn’t necessarily mean investors have greatly changed their outlook on the global economy.
“There’s still considerable uncertainties that hang over countries such as China and Brazil,” says Peter Wilson, international fixed income strategist at Wells Fargo.