The WSJ reports,"uneven stock indexes and low bond yields in the U.S., Europe and Japan are pushing waves of investor cash into markets from Brazil to South Africa that suffered big losses as recently as this past winter. Government-bond yields in the U.S. and Germany hit 2014 lows on Wednesday in response to the latest signs of soft Western growth.
Many investors are focusing on places such as India and Indonesia, where growth is healthy, economic overhauls are beginning and business-friendly leaders are taking power. Other markets are doing well even though change is more of a hope. In Thailand, one of the best-performing markets in Asia this year, a military coup last week barely rattled investors, who have largely stayed put.
The speed with which investors appear to have forgotten losses of up to 30% in some markets has been startling. Money is flowing back into emerging markets at the fastest pace in more than a year.
Mutual and exchange-traded funds focused on emerging markets added a net $13.2 billion in April and May, according to data from EPFR Global through May 26. That is the biggest two-month rise since February and March 2013, and follows 10 straight months of net selling.
Some of the world's best performers this year are members of the so-called fragile five, countries that have been seen over the past year as especially vulnerable to the end of central-bank stimulus. India's market is up 16% this year, largely as a result of hope that the election of reformist Prime Minister Narendra Modi will bring change, Indonesia is up 17%, and Brazil's main index has risen more than 16% in just over two months. Russian stocks have rallied 14% in the past month; the market is down just 3.2% since tensions escalated in Ukraine in mid-February.
On Friday, MSCI's emerging-markets stock index reached its highest level since October. The index is up 3% this year, compared with a 2.8% gain in MSCI's global index.
Investors have also snapped up risky bonds after interest rates in developed markets unexpectedly fell this year as economic growth stalled. Barclays PLC's index of dollar-denominated emerging-market debt has returned 6% this year, compared with 2.6% for U.S. Treasurys.
Emerging-market countries have been happy to satisfy investor demand by going on a bond-issuing spree. Their governments have issued $63 billion in debt, on pace to tie the previous record, set in 2012, according to Dealogic.
The move into emerging-market currencies, stocks and bonds marks a reversal of outflows of $60 billion in early 2014 that resulted from increasing political tensions in Turkey and worries that some countries had grown dependent on the flood of cash generated by central-bank stimulus.
Weaker growth in the U.S. and Europe has made it clear that stimulus—which has boosted asset prices around the world—won't be rolled back quickly. And growth has held steady in most emerging markets. The International Monetary Fund expects developing economies as a group to grow by 4.9% this year, compared with 2.2% in advanced economies.
The fact that emerging markets are illiquid and vulnerable to quick turns in sentiment, often driven by fear of being the last investor left, makes them riskier.
Another risk is a further slowdown in China, which is a major buyer of the commodities sold by countries such as Indonesia, Brazil and Chile. Chinese growth is running at its slowest pace in two decades and markets there are down as investors grow wary of a real-estate bubble, the slow pace of economic overhauls and a creaky financial system.
The best-performing markets this year are being driven by improving economies and reform efforts".
