Koesterich Russ

ETP Landscape: Duration Rotation

– Global ETP outflows of ($9.7bn) during January were driven by Equity redemptions of ($10.8bn) and diverged from the strong starts seen in the past two years. Investors continued to turn to ETPs to efficiently execute their market views during a volatile month for stocks…….

Russ Koesterich, BlackRock’s Chief Investment Strategist

– The bright spots for flows in January were in non-US Developed Markets Equity, which gathered $11.2bn as a number of key themes from 2013 continued into the new year.
o   Pan-European Equity brought in $4.0bn aided by the most encouraging January Euro Zone PMI reading since 2011.
o   Broad-based Developed Markets Equity (Global/Global ex-US) added $3.7bn and Japanese Equity exposures collected another $4.0bn.
–       Concerns over Emerging Markets as well as US valuations and earnings hugely impacted January flows. These concerns also led to stock market declines worldwide, with volatility likely to increase from historical lows going forward.
o   US outflows of ($12.0bn) primarily reflected Large Cap Equity redemptions of ($15.9bn), mitigated by sector inflows of $2.9bn.
o   Emerging Markets Equity ETP outflows reached ($10.0bn), the largest monthly outflows on record, driven by weak Chinese manufacturing data and the continuation of Fed tapering.

Russ Koesterich, BlackRock’s Chief Investment Strategist commented regarding emerging markets:
Investors continue to abandon emerging markets. Last week marked the 14th week of outflow from emerging market equity funds and the largest weekly outflow seen since August 2010.
Last week’s selloff came as number of emerging market countries – including Turkey – raised their benchmark interest rates in an effort to stem the pressure on their currencies, and as political turmoil in the Ukraine and Thailand continued. As we’re coming off a long period of market complacency that sent risk assets to relatively high levels, these local emerging market headlines are starting to have an effect amid relatively fragile market sentiment and a generalized flight to quality.
However, regardless of what sparked the latest selloff, the correction we are seeing, like the ones we saw in May and June, is a good reminder of these three truths about emerging market investing.
Truth: Volatility in these markets can’t be avoided. Emerging markets tend to be volatile, and they’re likely to remain so, at least in the near term. As emerging market currencies remain under pressure, the Federal Reserve tapers and several countries struggle with lingering structural issues, emerging market volatility is likely to remain high in the coming months.
Truth: Not all emerging markets are created equal. In other words, the issues facing countries like Turkey and Indonesia are not the same ones facing other emerging markets. Despite the dour emerging market headlines, some emerging markets, particularly in Northern Asia, appear more resilient. For example, both China and South Korea are running current account surpluses and both have large foreign exchange reserves.
Truth: Emerging markets offer deep value. Given that they’re generally growing faster than their developed world counterparts, emerging markets still look cheap by most metrics. Currently, emerging market equities are trading at about a 40% discount to developed country stocks. This represents the largest discount since the financial crisis.


Source: – BlackRock ETP Research

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