By Ashley Lau
NEW YORK (Reuters) – U.S. investors who fled emerging market equities at the beginning of the year are coming back with a vengeance.
So far in the second quarter, they have poured $5.3 billion into related exchange-traded funds, citing growth prospects and attractive valuations for a group they had been selling broadly since September. That is more than double the total net investments in emerging market equity ETFs for all of 2014, according to FactSet data.
In the first quarter, investors pulled $1 billion out of the group.
As U.S. stocks hit new highs, shares of companies in emerging markets look cheaper than U.S. stocks, said Heidi Richardson, BlackRock’s global investment strategist.
“Valuations are looking much more attractive,” Richardson said, noting the discount on price-to-earnings for emerging markets relative to the U.S. and developed markets.
The SPDR S&P 500 ETF, for example, has a current price-to-earnings ratio of 20.28, while the Vanguard FTSE Emerging Markets ETF and iShares Emerging Markets ETF have price-to-earnings ratios of 13.02 and 13.05, respectively.
Emerging market equity ETFs on average have returned 11.4 percent to investors so far this year, after losing 1.3 percent in 2014, according to FactSet data.
Emerging markets had fallen out of favor heading into 2015, as investors acted on concerns that the whole group could be hurt by a strengthening dollar, falling commodity prices and expected Federal Reserve interest rate hikes. Countries such as Brazil and Turkey, which have a big portion of their debt denominated in dollars, are hurt as a stronger dollar makes it more expensive to repay their debt.
The dollar index gained 12.8 percent in 2014 and another 11.2 percent at its high in the first quarter of 2015, but has since declined 4.9 percent from its peak in March.
That shift, combined with a relative valuation gap between emerging markets and the United States, and aggressive monetary policy easing abroad, have all contributed to a renewed interest in emerging markets.
“We’ve seen a significant broad-based reduction in interest rates throughout the emerging markets world, which has encouraged people to have a look in anticipation of a rebound in emerging markets economic activity,” said Nicholas Smithie, chief investment strategist at New York-based Emerging Global Advisors.
CHINA AND INDIA LEAD THE PACK
China and India have been favorites among emerging market investors, with the iShares MSCI India ETF and the iShares MSCI China ETF the two biggest single-country asset attractions among emerging markets funds so far this year.
“India is going to be the fastest-growing country among emerging markets by this year or the next as growth improves,” Emerging Global Advisors’ Smithie said. “We think that’s a sound fundamental story.”
Flows into U.S.-listed India ETFs year-to-date have been $2.6 billion, while flows into U.S.-listed China ETFs year-to-date have been $1.2 billion, according to BlackRock data. India and China ETFs have returned on average 20.6 percent so far this year.
The regional ETFs have even attracted some big money investors too, including Leon Cooperman’s Omega Advisors, which bought shares of the iShares MSCI India ETF at the end of March, and Louis Bacon’s Moore Capital Management, which owns several emerging market ETFs, according to U.S. regulatory filings disclosed last week.
Still, emerging markets can be volatile and carry a fair amount of risk. “There’s always a risk that emerging markets could do really well, but then something in China could cause those markets to go down over a period of time,” said Scott Kubie, chief investment strategist at Omaha, Nebraska-based CLS Investments LLC. “People will surge in and then surge out quickly.”
(Reporting by Ashley Lau in New York; Editing by Linda Stern and Dan Grebler)