US investments in emerging markets show sudden spike

MUMBAI: US investors pared their exposure to emerging market funds in 2015 but recent outperformance and change in outlook may have led them to rethink their strategies. The allocation of US investors in EM funds dropped to 12% of total equity investment in 2015 compared with 18% in 2009, according to US treasury data.

But they invested $3 billion during the week ended March 23, their largest intake since January 2013 as outlook for emerging markets changed and Fed rate hikes receded as a threat to investor sentiment.

The cut in exposure in 2015 follows a sharp underperformance of equities in these regions compared with developed markets since 2009 financial crisis and emergence of global offshore financial centres, which may be tax efficient for global investors. But outperformance of emerging markets in the first quarter of 2016 showed fresh willingness to hike exposure to buy risky financial assets. The total equity investment by US investors increased 9% on annualised basis between 2009 and 2015 to $6.7 trillion, which is equivalent to China’s market capitalisation. Investment in EMs increased 3% on an annualised basis in the same period.



Analysts believe that the direct equity exposure in the EMs has been reducing as money is routed through global financial centres such as the Cayman Islands. Emerging market exposure via Cayman Islands may exceed nearly $75-100 billion, according to Kotak Institutional Equities. The investment in Cayman by the US investors has increased 35% on an annualised basis to $904 billion.