Last week saw the largest weekly outflow from emerging markets (EM) equities since August 2015, according to BlackRock. On Monday there was the biggest daily redemption from the iShares MSCI EM Index ETF (EEM) — minus $1.5 billion — in more than a year and a half.
BlackRock said EM debt outflows began before equities, driven by selling in local currency, while hard currency has received inflows over recent weeks. In EM equities, the recent flows follow a period of steady inflows over the last 18 months, which BlackRock said is ‘a lightly—owned asset class in terms of positioning’.
Karim Chedid, investment strategist at BlackRock, said he has seen flows go back into European equities, which he says is interesting because of the pessimism around the outlook towards Europe amid political risk, particularly in Italy.
Why BlackRock is still bullish on EM
Despite the outflows, BlackRock remains constructive towards EM, arguing ‘now is not the time to sell out of EM equity positions’. The investment manager points to economic reforms, corporate fundamentals, reasonable valuations, as well as above—trend growth in developed markets as support factors for EM. Within EM, BlackRock prefers EM Asia, which makes up around three—quarters of the broader EM benchmark. In terms of individual countries, Chedid told IG that he likes China, India and southeast Asia.
Risks to emerging markets
The key risk factors outlined by BlackRock regarding this bullish view are rising trade tensions and faster than expecting rising rates from the US Federal Reserve (Fed). Chedid said the global growth picture has become much more concentrated in the US and China, which is why the trade tensions story matters so much for EM and explains the recent selling. However, Chedid said this is a typical mid—cycle correction and he believes EM will outperform developed markets (DM) and prefers EM equities to debt.