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Opinion

Emerging market equities: Don’t believe the hype

The emerging market equity boom might turn out to be leverage-fuelled.

The decoupling theory is back in vogue. Emerging markets equity prices are at an all-time high compared with developed markets. The FTSE All-World All-Emerging index is up 66% since its lows at the end of October. The Shanghai Composite index has risen 45% this year in local-currency terms.

Money continues to flow into emerging markets funds. Since the beginning of the year emerging markets equities funds have seen net inflows of $22.3 billion, according to EPFR Global, a data provider, as investors gravitate again towards riskier assets in their search for yield. In contrast, developed markets funds have posted net outflows of $53.8 billion over the same period.

Asia is attracting the most money, with inflows of $7 billion this year, followed by Latin America. Funds specializing in EMEA equities have lost nearly $1 billion this year, although cash is beginning to flow back in on a weekly basis.

What lies behind the turnaround in investor sentiment towards emerging markets? One argument is that the outlook for many developing countries is now rosier than it was in January. Driven by China, where there are tentative signs of economic recovery, investors are now more confident about certain emerging markets and assets.

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