As the ongoing background political noise continue to increase uncertainty in the markets, any guidance from the central bank meetings this week would help investors. The minutes and the rate decision which will be released by The Federal Reserve (FED) on Wednesday will be closely watched by market participants. The most important point would probably be the expected number of rate hikes for 2019 by the FOMC members. Bank of England is also expected to give dovish signals after increased uncertainty on Brexit. Investors would also watch closely emerging market central banks like Brazil, Indonesia and Russia.
Increased uncertainty on global economic & political outlook is letting global central banks to turn more dovish and, in this environment, emerging markets has seen an increased interest. How did emerging market fund flows evolve around FOMC meetings? What has changed since the recent dovish statements from the FOMC? What can we expect from the upcoming FOMC this week? To investigate these questions, we go back and look at flows around at each FOMC meeting since 2011, using EPFR database.
Figure 1 shows the total weekly equity flows to emerging markets vs developed markets. Each bar represents a weekly flow prior to FOMC date. The last three FOMC meetings has seen a rare occurrence for Emerging Markets. Since 2011, this is just the second time that emerging markets saw inflows at this scale and consistency in the weeks prior to FOMCs. More interestingly, in these three weeks, developed market equity funds saw total outflows – a steer towards EM equity on FOMC weeks which has not been seen in the last 9 years.
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Figure 1: EM vs DM Equity Fund Flows (%) on the weeks ending on FOMC dates
This all look like good news for Emerging markets. But, what happens next? Would the coming week be a repetition of the last three FOMC meetings? Or are we going to see a reversal?
Flows toward EM equity has turned upside down as of last week. Emerging Markets Equity Funds saw their highest outflow since June of last year. Figure 2 show, the total weekly equity flows to emerging markets on the weeks around FOMC meetings. In the last three FOMC meetings on November, December and January we have seen inflows to emerging markets equities prior to FOMC. This is not the case this time. In fact, this is the first time we are seeing outflows from this asset class prior to FOMC since August-2018.
Figure 2: The total weekly equity flows to emerging markets on the weeks around FOMC meetings.
Does this mean investors are selling emerging market equities totally? Or are they being selective? Figure 3 and Figure 4 show that back around November and December FOMC meetings we have seen inflows to single-country funds. The funds that are investing to overall basket – GEM funds- has not seen a huge interest on those months around FOMC meetings. But, on January, the opposite happened. The emerging market equities were being bought as a basket – showing an increased confidence on the overall asset class.
The outflows we see in the data for the week ending 13/03/2019 shows an increased cautiousness on single country mandated funds. Funds with Emerging Asian mandates has seen the biggest outflows, on the other hand, basket funds have not seen a significant outflow.
Flow data would be crucial to understand and uncover the changes in views towards emerging markets, in the coming weeks. Increased flows to especially basket emerging market funds post-FOMC would help investors to confirm and sustain the positive view on this asset class.
Figure 3: The total weekly equity flows to emerging market basket funds on the weeks around FOMC meetings.
Figure 4: The total weekly equity flows to emerging market single country funds on the weeks around FOMC meetings