While we are only four months through 2017, I'm always fascinated to see how quickly investor sentiment can change. As mentioned in our September Market Commentary we felt emerging markets may be leading a global "recovery" and igniting further market gains. Things were moving along leading up to the election but afterwards there was an immediate sell off in both foreign and emerging market equities and bonds as people interpreted a Trump victory could lead to more protectionist trade policies which could damper imports and slow growth outside of the U.S.
As we approached the end of 2016, the Federal Reserve increased its key interest rate by .25% and hinted at multiple hikes in 2017. Much of the investment community seemed to argue for a continued overweight in U.S. equities and bonds over foreign and emerging holdings. The data backed this up as net redemptions from Emerging Market Equity funds hit a five week high and net weekly redemptions from Asia (Ex-Japan) equity funds was the highest since September of 2015. One could argue this strategy had worked well since the start of 2014. Why would it stop given the political backdrop and negative investor sentiment towards non U.S. investments?
Through March of this year, the top performing equity asset class by was Emerging Markets followed by Foreign Developed. The top performing bond asset class was Emerging Market Gov't Bonds. Quite the opposite of what many thought.
Not surprising but now inflows into these two areas are increasing as emerging market equities and debt are seeing some of their largest inflows in over 8 months. It's important to remember that this is a short period of time and and small data size but it goes to show how unpredictable markets are and how quickly investor sentiment can change. Will this continue for the rest of 2017? Your guess is as good as mine but many investors constantly seem to forget that markets are a forward-looking mechanism and place too much emphasis on past results and assumptions.
The reality is an investors focus should be on expected future growth and investor sentiment. Emerging market earnings growth is expected to increase significantly in 2017 and provide some of the best growth in years, yet sentiment became extremely negative after the elections. Couple that with Emerging Markets struggling over the last 5 years, and the bar was set fairly low. This reminds me of the famous Wayne Gretzky quote, "Skate to where the puck is going to be, not to where it has been." The same can be applied to investing and while it's not easy, history has proven this to be a winning formula. At times it does make sense for an investor to over or underweight certain asset classes, but this is typically done at the wrong time. We will have to see how the next few quarters shake out before making any type of conclusion but it just goes to show how money inflows in certain assets seems to come in after gains have been shown.