Emerging markets in “sweet spot” this year, says Asia Securities

• Points out weaker dollar could trigger fresh wave of capital inflows into emerging and frontier market such as Sri Lanka

Emerging market economies have seen fund inflows turning positive last November in a sign that global investors are rebalancing their fund allocations seeking higher yields and cheaper emerging market valuations, and the trend could set off a positive momentum for portfolio inflows into Sri Lanka. 

According to a recent report by Asia Securities Research, the weaker United States dollar, which could stay through the medium term, could trigger a fresh wave of capital inflows into emerging markets. 

In November 2020, the emerging market fund flows turned a corner for the first time since March last year to turn positive, setting the path for a further take off in 2021 as developed market bond yields hover either near zero or negative territory. 

The research arm of the Colombo-based stockbroker said with lower foreign currency risk, the cheaper market valuations in emerging market economies would woo foreigners more into the risky assets. 

Sri Lankan stocks made a strong rebound during the second half of 2020, largely due to lower interest rates and political stability. 

The Colombo Stock Exchange broke the 7,000 psychological threshold during the first full week of trading ended on January 8, 2021 and is now closing in on the 7, 500 point mark.

Sri Lankan stocks were powered mostly by the local high net worth individuals and retailers as foreign selling continued through 2020. 

But the current bull run and the unattractive yields in the developed markets could prompt foreign investors to re-look at the more promising emerging and frontier markets, which Sri Lanka is part of.  

While the emerging markets have underperformed the S&P 500 over the last decade, earnings expectations of the emerging market entities are now on the rise as such economies are recovering faster from the pandemic than the developed nations.

Meanwhile, emerging markets are forecasted to grow at 5.0 percent in 2021, faster than 4.0 percent for developed markets as the investors cheer the better pandemic management in emerging markets. 

Therefore, with stronger growth prospects and low currency risks, Asia Securities Research believes that the emerging markets are in a “sweet spot” 
in 2021.