Fund managers bullish on emerging markets, ratings agencies less keen

New York (Reuters): A number of global fund managers say they are buying emerging market assets for 2017 after the beating the sector has taken since the US election in November, even though credit rating agencies have a less positive outlook.

Since the election of Donald Trump as US president, emerging market stocks are down nearly 7.0%, based on the Morgan Stanley Capital Index, and the yield spread of emerging market bonds over benchmark US Treasuries is wider by 10 basis points, reversing some of the gains seen earlier in the year.

On 8 November, the date of the US election, the EMBI Global year-to-date total return was 14.04%, and a week later, on 14 November, it had halved to 7.60%.

Currencies such as Mexican peso and the Turkish lira have tumbled 10% or more in the wake of the election.

US President-elect Trump has pledged to impose protectionist trade policies and restrict immigration which would likely damage most emerging market economies.

The Washington, D.C. bank lobbying group, the Institute for International Finance, reported this week that $ 23 billion has flowed out of emerging market funds since 4 October, with $ 18 billion of that taking flight since 9 November.

“The magnitude of outflows has diminished significantly in recent weeks, but the direction has remained persistently negative,” said Scott Farnham, an IIF research analyst.

BlackRock, the world’s largest asset manager is expecting to reap solid gains from all emerging market asset classes, especially bonds, the firm’s chief fixed income strategist, Jeff Rosenberg said at the company’s recent global outlook summit.

Other global fund managers also see a rebound on the horizon.

Ricardo Adrogué, head of emerging markets debt at Baring Asset Management Ltd, said analysts, including ratings agencies, are confusing structural versus cyclical problems when evaluating the sector.

“Our assessment of emerging markets is actually strengthening at the time that developed market institutional framework is weakening,” he said.

Similarly, Michel Del Buono, head of portfolio strategy at Makena Capital Management LLC, who oversees $ 18 billion across asset classes, also has a bullish outlook.

“If you’re exposed in the right way and you have a long-term perspective you should keep a significant weighting to emerging markets,” he said.

Del Buono said he favours investments in things like healthcare, retail and for-profit education in places like Nigeria, Indonesia and the United Arab Emirates.

If prices keep dropping, Del Buono and Adrogué said they would keep adding to their positions, echoing what other investors told Reuters,

Morgan Harting, lead portfolio manager for multi-asset income strategies at AllianceBernstein said he is especially bullish on the energy sector and is investing in countries like Russia and Brazil as well as companies like Hungarian oil and gas group, Mol Group.

“As we get more economic data to validate that the underlying fundamentals in these economies continues to firm then people are going to get more aggressive in investing in emerging markets,” Harting said.

However, credit ratings agencies S&P Global, Moody’s Investors Service and Fitch Ratings have recently lowered positive credit outlooks and written even more negative outlooks for emerging markets. Moody’s even highlighted the risk of capital flight and potential weakness in the banking sector.

Diane Vazza, managing director of global fixed income research at S&P Global ratings agency, noted worries about geopolitical risk and energy companies not being able to adjust to a longer-term trend of lower prices for oil and gas.

“About a third of (emerging market) corporates have negative outlooks,” Vazza told Reuters. “So we expect additional downward pressure across emerging markets.”

ETFs globally gather record cash in 2016: BlackRock

​Reuters: Investors funnelled $375 billion into exchange-traded funds in 2016, investment manager BlackRock Inc said on Tuesday, a global record that came as investors looked to cut costs.

The total, which is preliminary, compares with $348 billion in 2015 and includes a record $286 billion haul in the United States, home to the funds’ biggest market.

ETFs are a basket of stocks or other assets traded by individual investors and institutions. Fund managers from BlackRock to Vanguard and Schwab offer index ETFs that try to track, not beat, the market. They have sliced management fees on some funds to as little as $3 annually for every $10,000 managed. All three companies announced price cuts last year.

Those low fees along with other cost savings and conveniences have helped the more than $3 trillion ETF business take assets from rival financial products, including actively managed funds that attempt to beat the market but may fall short of that goal.

U.S.-based active stock funds recorded $288 billion in withdrawals in 2016, the largest on record, according to preliminary Thomson Reuters Lipper data through November.

ETF issuers were also able to draw investors into “smart beta” products that often attempt to beat the markets but do so based on a set of rules governing how they invest, rather than a portfolio manager making those calls. The products can be pricier for investors than traditional index funds while still undercutting active managers.

“The fact that we’re at new-record inflows with such a slow start is a pretty strong reversal,” said David Perlman, an ETF researcher at UBS.

Markets started 2016 in bad shape, after the U.S. Federal Reserve raised rates and as oil prices cratered. Stocks managed to rebound from a February low, but events including the U.S. presidential race and the British vote to exit the European Union kept investors skittish.

Money moved to the perceived safety of the fixed-income market, and BlackRock’s early data showed bond ETFs taking in a record $115 billion in 2016.

New York-based BlackRock, with $1.3 trillion in global ETF assets, is the largest provider of such funds, as well as the world’s largest money manager overall. It said its iShares ETF brand attracted $140 billion during the year.