As emerging market countries struggle with their own troubles, investors are shunning single-country allocations in favor of broader exposure.
Money managers said a combination of domestic issues, rising U.S. interest rates and a strengthening U.S. dollar is creating a perfect storm for emerging market countries. Following months of inflows to single-country strategies, some managers now are seeing outflows — at the same time they're seeing inflows to global emerging market allocations.
The latest emerging market to hit headlines is Turkey, which amid economic woes and a trade spat with the U.S. has seen its currency, the lira, drop 7.76% against the dollar between Aug. 9 and Aug. 17, and 44.82% since the start of 2018.
Data from provider EPFR Global for the week ended Aug. 1 show global emerging markets equity strategies recorded their biggest inflows in more than three months, at $895 million. That followed almost $3.5 billion in net outflows for the entire four weeks preceding that period.
In contrast, about half of emerging markets country strategies posted outflows, for the week ended Aug. 1, EPFR reported.
Money managers agreed conditions are encouraging investors to move toward the less risky end of emerging markets allocations.
Emily Whiting, emerging markets and Asia-Pacific equities investment specialist at J.P. Morgan Asset Management in London, said inflows to emerging market countries dwindled after a number of "worries" hit in 2018. It started around late March with Russia — and since then, political, economic and geopolitical issues have sprung up in Argentina, Brazil and Turkey.
"Think of it as a pyramid — the bottom is most stable, (that is) global emerging markets," Ms. Whiting said. Moving up the pyramid, taking more risk, investors allocate to regional and then to single-country strategies.
And as investors become more cautious, they take from the top of the pyramid.
"As people move out they take from the risk. They still want to be exposed, but leave it to the managers to work out where to be," she said. "We have seen net positive inflows into all of our GEM products so far this year, whereas we have seen outflows in the likes of Latin America, emerging Europe, India and so on. We can see that as people start to derisk, they go from single country" to broader allocations, she said.
While money managers and investors long have stated the case for emerging markets to be judged on their own merits, rather than as one homogeneous group, diversification still appears to win out when volatility rises.
"Idiosyncratic risk is on the rise in EM due to elections (and) geopolitics, so it's more optimal to have a diversified portfolio" where a portfolio manager can run risk more directly, managing volatility and downside risk, said George Varino, head of emerging markets solutions in New York at Investec Asset Management. "We are in a period of time where uncertainty is on the rise, and it just makes sense to choose strategies with more diversification." The firm does not publicly disclose a breakdown of assets under management.