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SPDR comments on emerging market ETF inflows

Antoine Lesné (pictured), Head of SPDR ETF Strategy & Research EMEA reports that there have been USD3.2 billion of inflows to emerging market debt since the beginning of the year, making it the second-best asset gathering class in the European ETF market. 

The popularity of emerging market debt is driven by the success of the US monetary authorities in flagging up their planned rate hikes, he says. “Janet Yellen has been doing a good job in terms of telegraphing this first rate hike,” Lesné says. “We knew inflation was on the rise but we were still looking for a bit more clarity on what the Trump administration would be doing. We have to thank the Fed speakers who have managed to change the market sentiments.”

Lesné believes that the question now for investors is where to go from here. “As we went into the meeting we had seen investors continue to rotate their portfolio positions to shorter maturity in their bond portfolios, moving away from US high yield bonds and going into equities.”

Lesné says he admires the Fed for producing a doveish hike that doesn’t kill the party. “Since the beginning of the year there have been some strong inflows into emerging market fixed income and debt. Usually when you are in a cycle of rate tightening you tend to see that those exposures are not necessarily the ones that do the best, but what we have seen is that investors have continued to favour emerging market debt.”

He observes that the US 10-year treasury yield is not increasing as much as would have been expected because inflation expectations are not as high as they have been in the US in the past months, so again emerging markets benefit as they offer a much better yield.

In addition, emerging market currencies are doing well which is another source of return for investors.

“I believe that the trend is really positive for now for this exposure, especially as the Fed’s expectations and forecasters are not too bullish. There is no need for the Fed to act with no more than gradual normalisation for now – they will do maybe two more hikes over this year,” Lesné says. 
In another trend, he reports that he is starting to see investors coming back to European equities. “The worry about the French elections is not killing the economic strength in the European area,” he says. “Investors are coming back to Europe in terms of an asset allocation standpoint.”

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