Trade war fear is causing a shift in EM fund flows

NEW YORK: When it comes to Us-china friction, Asia’s loss is becoming Latin America’s gain.

Exchange-traded funds listed in the US that invest in Asian bonds and stocks have suffered net sales of Us$1.4bil in the past two weeks through May 29, extending a streak of outflows that started in February.

Similar ETFS investing in Latin America have attracted about Us$60mil of funds over the two-week period, despite the region becoming the new coronavirus hot spot.

The shift also comes after the outperformance of Asian assets since the depth of the coronavirus sell-off. A gauge of equities in the region is now only down about 6% this year. Latin American shares have still lost more than 30%.

As Asian assets face the risk of being caught in the crossfire of a deteriorating relationship between the world’s two biggest economies, those in Latin America are starting to see a number of positives.

Prices are recovering for commodities such as oil and copper, which are among the region’s major exports, while valuations are seen as relatively attractive after the region lagged behind the rest of its global peers.

“You could see it in the context of a leadership hand-off from Northeast Asia, which has had the most success defeating the virus, to Latin America, which hasn’t yet brought cases down so much, but is already seeing activity improvements,” said Morgan Harting, who helps manage Us$1.2bil in Alliancebernstein’s EM multi-asset fund here.

“Investors seem very focused on activity data.”

The green shoots of a recovery in Latin America are still threatened by the worsening virus outbreak.

Even as some parts of Brazil, including epicenter Sao Paulo, have begun reopening after lockdowns, the country reported a record number of daily deaths from Covid-19 on Wednesday. Mexico saw its first daily rise of more than 1,000 deaths.

Here’s a roundup of comments from investors about the contrasting outlook for the two regions:

> Mark Mobius, co-founder of Mobius Capital Founders:

The impact of the virus in Latin America will not be as great due to the younger population.

The situation may be exaggerated as death counts may also be inaccurate and could include deaths from other causes. Emergingmarket assets are on a strong uptrend, and this likely will continue amid a V-shaped recovery.

Us-china tensions have been largely priced in, though the continued shutdown policies, which are causing unemployment, and could lead to increased violence, pose the biggest risk. China stocks are expected to continue rising, but the increase won’t be as great as other emerging markets.

> Greg Lesko, a money manager at Deltec Asset Management in New York:

China massively outperformed the rest of EM in the first quarter. The rally in Asia has led investors to look elsewhere. As the US opens and recovers, Latin America should benefit.

> Jean-charles Sambor, head of emerging markets fixed income at BNP Paribas Asset Management in London:

From a macro standpoint, Asia looks to be in better shape as China’s economy recovers and this will have a positive impact on neighbouring countries. Latam is still struggling with the virus and commodity prices are still low. From a valuation standpoint, there are opportunities in Latam such as in investment-grade dollar bonds in Mexico, or in lowyield local currency debt like Peru. China high yield continues to look attractive, especially property developers that will benefit even amid Us-china tensions as Beijing will boost stimulus. — Bloomberg