Aurum Wealth Management Blog

Emerging Markets Flow Show

Much is going in the world of geopolitics with effects on financial markets. From China allowing its currency to float in a wider band and of course daily news out of Russia, opportunity and risk are ever present. This note touches on an interesting development around investor behavior related to the broader emerging markets region.

According to EPFR Global, investors sold $100 billion of emerging market equity funds over the last 12 months. This amounts to approximately 10% of assets under management, compared to 2008 when 15% of assets were pulled (during the 60% peak-to-trough drawdown in only six months). The recent streak marks 21 straight weeks of outflows, a record in the last 15 years, after the 22% price drawdown over the past three years.

Emerging markets moved essentially sideways (top of the below graphic in gold) since late 2009.

Up until the beginning of 2012, U.S. stocks and emerging markets largely traded together over the previous five years. To start 2013, the S&P 500 traded with a Price/Earnings multiple of 13, compared to 10 for emerging markets. Today, the S&P 500 trades at 15.4 while emerging markets became cheaper with a P/E of 9.5.

The underperformance over the last two years seems to be the mean reversion for the emerging markets outperformance over the last 15 years. In hindsight, the outperformance seems obvious, but in 1999, U.S. stocks were flying high with large cap growth and technology going up 30%+ per year, while emerging markets were just one year removed from the Asian currency crisis in 1998.

Back in mid-2001, when the emerging markets index and S&P 500 began to diverge, the Forward Price/Earnings ratio was at 22X for the S&P 500 while the emerging markets stood at 10X.

The point being, the divergence has gotten much greater in the past, as investors reallocate to what has performed the best, namely US stocks. And as we know, decades of behavioral research shows that it's in our human DNA to chase returns. With the S&P 500 making new all-time highs, the current Forward Price/Earnings premium could increase versus emerging markets. As investors surrender assets at discount prices due to the thought of losing more money, our portfolios will be methodically rebalancing to those undervalued assets.

For more information, please contact Aurum Wealth Management Group at 440-605-1900 or visit our website at Stay up to date – follow us on Twitter @aurumwealth and to receive weekly investment-related updates, sign up for our free newsletter.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

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