Spurred on by ultra-easy monetary policy settings around the world, and the belief that the US Federal Reserve won’t lift interest rates again anytime soon, investors worldwide are piling back into risk assets, searching for any yield anywhere they can find it.
The hunt is on in earnest, despite obvious risks stemming from valuations at these lofty levels.
Given its relationship to movements in the US dollar and global bond yields, emerging markets are benefiting more than most.
This is no better demonstrated than in the chart below from ANZ. It shows foreign capital flows in and out of Asian emerging market bonds and stocks over the past two years.
After significant outflows in the second half of 2015 and earlier this year, due to the twin impacts of the US interest rate hike in December 2015 and concerns surrounding the Chinese yuan, investors have returned with gusto recently, being net buyers of both bonds and stocks in four of the past five months.
July was a particularly strong month, notes Khoon Goh, head of Asia research at ANZ.
Strong risk appetites and hunting by yield hungry global investors have seen a spike in foreign portfolio inflows into EM Asia. Expectations that the US Federal Reserve will delay policy normalisation, coupled with prospects for further monetary policy stimulus from other major central banks, and signs of stabilisation in China have all led to increased risk appetites.
Excluding China, Goh notes equity inflows totaled $US13.6 billion. Combined with bonds which swelled by $US4.8 billion, the $US18.4 billion increase was the second largest monthly inflow recorded in the past two years.
And the influx into emerging markets isn’t finished yet, says Goh.
“The strong inflows have carried into August with $US4.3bn of equity inflows so far in just over a week,” he said. “The hunt carries on.”