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16 Jul 2018

EM equities: Should I stay or should I go now? 


Trade tensions, rate rises and dollar appreciation have combined to cloud the outlook for emerging market equities. And, after a long period of strength, the tide appears to have turned as far as flows are concerned. After gathering €16 billion in assets in the past two years, outflows began in May and appear to be accelerating.  


Higher yields in safe haven assets like treasuries can make EM equities appear less worth the risk – to the extent that flows in or out of EM equity ETFs tend to be inversely correlated to the 10-year US treasury yield (albeit not perfectly). The last time rates were near 3% - during the “Taper Tantrum” of 2013 – we saw outflows of around €6bn from Feb 2013 to Feb 2014. Now that the 10-year yield has passed 3%, the outflows are becoming significant. €500m left these markets in May after 15 successive months of inflows. That was followed by €1.6bn in June – and there’s every sign this will continue should yields continue their climb.  


EM equity ETF monthly flows (in €m) vs. 10-yr US treasuries (in %)


Chart 1

Source: Lyxor ETF, Bloomberg monthly data from 1/1/11 to 29/6/18.For illustrative purposes only



Rate rises = reallocations

When US interest rates rise investors tend to shift their portfolios away from EM equities and back into US equities. We saw outflows of around €6bn from EM equities during the “Taper Tantrum” while inflows into US equities were very similar. All things being equal, that trend could continue. We’re not saying it should however; there are other options available to those less inclined to follow the herd. Asia for example presents pockets of opportunity – provided you know where to look.


How EM & US equity flows react when rates rise (in €m)


Chart 2

Source: Lyxor ETF, Bloomberg monthly data from 31/1/12 to 29/6/18. For illustrative purposes only


Navigating Asian markets

That’s not to say Asia has escaped the EM malaise, far from it. Outflows have in fact been accelerating and the markets are now some way below their January performance highs. But for all the external vulnerabilities, Asia’s fundamentals look underpriced, particularly as earnings growth expectations are robust and profitability is improving. The region’s exporters could be at risk from any moderation in global growth but its domestic-focused markets offer some insulation from those issues, hence our preference for India over markets like Taiwan and Korea.  Here’s what we think is next in Asia:

 

            Views on Asia

India: Domestic money is the key driver of equity markets despite the pressure of rising oil prices, meaning Indian equities are now less correlated to EM peers. The earnings outlook is strengthening, and the worst of the bad bank loans cycle is behind us. Forthcoming general elections (April-May 2019) are a wild card, as are global liquidity risks. Neither should prove too disruptive for now. Watch our vlog on how to invest in India.

View our Lyxor MSCI India ETF


China: We’re positive on onshore equities because they are less correlated with other Asian markets, reasonably valued (we’ve seen earnings upward revisions in recent months) and offer exposure to domestic consumption. We also believe trade tensions and tariffs will be manageable.

View our Lyxor Fortune SG MSCI China A ETF


ASEAN: The bloc, most notably Indonesia and Thailand, also offers some insulation from US and Europe-related risks. Reasonable valuation, recovering capex and improving bank balance sheets augment the appeal.

View our Lyxor MSCI Indonesia

View our Lyxor Thailand ETFs


North Asia: We’re more cautious on the prospects for North Asian exporters like Korea and Taiwan. They are especially vulnerable to escalating trade tensions or an Italy-led euro crisis.

Japan: The short-term case for Japan isn’t as strong as it was given yen upside risk and cabinet entanglement in political scandals. But the missing element in the long-term reflation case – wage growth acceleration – is (slowly) materializing.


Sectors: The domestic earnings cycle remain strong and favours the consumer and financial sectors.

 

Why choose Lyxor for Asian equities?*

  • 12 ways to access emerging Asia
  • $3.2bn in AUM
  • The cheapest EM Asia and physical China A Shares ETFs on the market
  • The oldest and largest India ETF on the market
  • 12+ years' experience managing single country and regional EM equity ETFs

*Source: Lyxor International Asset Management. Data as at 05/07/2018. The Lyxor Fortune SG MSCI China A has the lowest TER in the market, tied with three other competing physical China A shares ETFs. Statements refer to European ETF market.

Important information

FOR QUALIFIED INVESTORS ONLY– This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

This document has been provided by Lyxor International Asset Management that is solely responsible for its content.

Lyxor MSCI India UCITS ETF – Collective investment scheme (FCP) domiciled in France and Lyxor Fortune SG MSCI China A (DR) UCITS ETF – Acc - Sub-fund of the MULTI UNITS FRANCE investment company (the "Company") domiciled in France are collective investment schemes approved by the Swiss Financial Market Supervisory Authority FINMA (FINMA) as foreign collective investment schemes pursuant to article 120 of the Swiss Collective Investment Schemes Act of 23 June 2006 (as amended from time to time, CISA) for distribution in Switzerland to non-Qualified Investors as defined in the CISA. The above mentioned Exchange Trade Funds (ETFs) are listed on the SIX Swiss Exchange.

Lyxor MSCI Indonesia UCITS ETF – Acc - Sub-fund of the MULTI UNITS FRANCE investment company (the "Company") domiciled in France and Lyxor Thailand (SET50 NET TR) UCITS ETF – Acc - Sub-fund of the MULTI UNITS FRANCE investment company (the "Company") domiciled in France are a collective investment schemes not approved by the FINMA as foreign collective investment schemes pursuant to article 120 of the CISA for distribution in Switzerland. Accordingly, the non-Registered Funds may be offered in Switzerland exclusively to Qualified Investors as defined in the CISA and its implementing ordinance.

This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

Financial intermediaries (including particularly, representatives of private banks or independent asset managers, Intermediaries) are hereby reminded on the strict regulatory requirements applicable under the CISA to any distribution of foreign collective investment schemes in Switzerland. It is each Intermediary’s sole responsibility to ensure that (i) all these requirements are put in place prior to any Intermediary distributing any of the Funds presented in this document and (ii) that otherwise, it does not take any action that could constitute distribution of collective investment schemes in Switzerland as defined in article 3 CISA and related regulation.

Any information in this document is given only as of the date of this document and is not updated as of any date thereafter.

This document is for information purposes only and does not constitute an offer, an invitation to make an offer, a solicitation or recommendation to invest in collective investment schemes.  This document is not a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other trading venue as defined by the Swiss Financial Market Infrastructure Act of 19 June 2015 (as amended from time to time, FMIA), a simplified prospectus, a key investor information document or a prospectus as defined in the CISA.

An investment in collective investment schemes involves significant risks that are described in each prospectus or offering memorandum. Each potential investor should read the entire prospectus or offering memorandum and should carefully consider the risk warnings and disclosures before making an investment decision.

Any benchmarks/indices cited in this document are provided for information purposes only.

This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.

This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investments in financial products.

The Representative and the Paying Agent of the Funds in Switzerland is Société Générale, Paris, Zurich Branch, Talacker 50, 8001 Zurich.

The prospectus or offering memorandum, the key investor information documents, the management regulation, the articles of association and/or any other constitutional documents as well as the annual and semi-annual financial reports may be obtained free of charge from the Representative in Switzerland.

In respect to the units/shares of the Funds distributed in and from Switzerland, place of performance and jurisdiction is at the registered office of the Representative in Switzerland.

Research disclaimer

Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

Conflicts of interest 

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

 

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