Money pours into risky assets before ECB QE

Money has been rushing into risky assets shortly before the European Central Bank starts its quantitative easing program, data from the latest capital flows surveys showed.

The riskiest of the assets saw the biggest inflows, with high-yield debt and emerging markets experiencing the largest combined inflows in two years, according to Bank of America Merrill Lynch.

Data analysed by RBS shows that emerging markets fixed income funds saw their highest weekly inflows since June 2014, at 0.47% of assets under management (AUM) in the week that ended on February 25.

Emerging Market Debt and Equities Inflows

Money is flowing back into emerging markets debt. Source: RBS

Both hard and local currency emerging market debt funds saw large inflows, at 0.48% and 0.20% of AUM.

Inflows into emerging market equities were positive but much more modest, at just $300 million, or 0.08% of AUM. Emerging Europe was the primary beneficiary, with 0.25% of AUM worth of inflows. This could partly be explained by the fact that a lot of investors took money out of emerging Europe stocks when the crisis in Ukraine flared up, and now some of them are bringing their funds back.

RBS analysts said the turnaround in sentiment for emerging markets debt was “primarily driven by the global volatility compression in February, with (Federal Reserve chair) Janet Yellen’s ‘non-committal’ testimony on Tuesday being an additional positive factor for emerging markets fixed income.”

Investors have been worrying that once the Fed starts raising rates, money will flow out of emerging market debt and a crisis caused by a sudden shortage of liquidity could follow.

This latest inflow of capital could be a sign that their worries are beginning to subside and money could once again chase yield in emerging markets as investors believe the ECB will now play the role the Fed had played until last October, boosting liquidity around the world.

Capital allocation depends of course on the country. Russia saw record low monthly allocations to its fixed income whereas Turkey and South Africa saw multi-month highs.

This is because besides Western sanctions following the conflict with Ukraine, which it started last year, Russia has also been hit hard by the rapid fall in oil prices over the past six months.

The lower oil prices have helped both Turkey and South Africa. As net energy importers, they saw their current account deficits decrease without having to make painful cuts in imports by forcing down domestic consumption.

By region, Latin America enjoyed the biggest inflows to its debt among emerging markets, worth 0.47% of AUM, followed by Emerging Europe with 0.38% of AUM. Emerging Asia is out of negative territory, with 0.29% worth of AUM in inflows.

In other asset classes, European equities continue to be “the crowded trade,” as the analysts at Bank of America Merrill Lynch put it.

European stocks saw inflows of $5.5 billion in the week ending on February 25, the seventh week in a row that money went into the asset class.

By contrast, US equities saw outflows of $5.8 billion. Japanese stocks saw modest inflows of $300 million.

In Europe, government bond funds saw their second week of outflows, as they remained under pressure because of their negative yields.

With the ECB due to start purchasing government bonds this month, it looks like yields will remain negative for many government bonds in the eurozone, so the asset class is likely to see more outflows going ahead.

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