After the surprising outcome of the US last year, global markets started adjusting according to the rhetoric coming out of the Trump camp. As we have seen over the past few months that the new President is facing difficulty in implementing many of campaign promises.
Emerging market equities and bonds had a tough time during the initial few weeks of Trump. The new president held the protection of American industries line which too many suggested that global traded could be disrupted.
Fast-forwarding to the end of first quarter of 2017, those fears have diminished and un-winding of the Trump trade is taking place where investors are now pouring money back into the emerging market economies.
Furthermore, the dovish behaviour of the Federal Reserve in raising rates has also impacted emerging markets especially their currencies. During the first quarter, the dollar has weakened across the board compared to EM currencies. Significant rebound in currencies of Latin American countries, Russia and India can been seen. Fears of swift tightening cycle have been subsided for now.
The growth data coming out of EMs is also attracting funds. South American countries like Brazil and Argentina are slowly getting back on their feet. The commodity cycle seems to be working in their favour. Stability in China has also played a pivotal role here as compared to last year where economic activity was very volatile. While risks of a hard landing still remain with China but continuous positive steps by Chinese central bank has eased investor’s mind.
Locally, here at the PSX during the first quarter of the year net outflow $162mn was witnessed. Since the start of April we have seen about $8mn of inflow. Although, Pakistan’s market is not yet upgraded to EM status, some active funds could be taking positions. On the other hand, fears of devaluation are high which would be keeping many foreign investors on the sidelines.
However, if the dollar internationally remains weak then we can see some funds taking fresh positions in Pakistan equities as part of their overall EM trade.