Dollar dip and global jitters create sweet spot for EMs: Cameron Brandt

"While flows into dedicated India funds remains well below the kind of levels we saw in 2023-24, they have been consistently positive now for over two months and India's combination of defensive characteristics and still strong growth is definitely making it one of the more consistent destinations for mutual fund flows," says Cameron Brandt, EPFR Global.


It clearly seems like markets think that what we had last month in terms of all the geopolitical tensions, the start of the month seems to be the end of it all and all is hunky dory, at least going by the price action.
Cameron Brandt: Well, we do seem to be in a period which fits the definition of that they frequently use for the weather in New England, which is if you do not like it, wait a couple of hours. But it is very much week to week at the moment certainly in terms of flows. And sentiment is very-very quick to change. I would characterise it as somewhat brittle. That said, there has definitely been a modest rotation in favour of emerging markets.

We are seeing much stronger flows into the diversified gem funds and in a market where frankly most people are at least trying to work out what safe looks like.

It has not been a bad period for India. While flows into dedicated India funds remains well below the kind of levels we saw in 2023-24, they have been consistently positive now for over two months and India's combination of defensive characteristics and still strong growth is definitely making it one of the more consistent destinations for mutual fund flows.


What is importance of the dollar index in the overall scheme of things? I mean, in the long term if dollar remains below 100, could that really open the floodgate of further inflows into emerging markets?
Cameron Brandt: Well, certainly, the health of the dollar and the impact that US monetary and fiscal policy are going to have is something that people are paying a lot of attention to. I heard some discussion before I joined you about indexes here hitting or testing record highs. But what we have been seeing in the flows is while there is a fairly strong support for US equity markets, especially through the diversified funds, it is not a particularly strong conviction. Allocations towards the US have been trending downwards recently.

We have noticed that foreign domicile US equity and bond funds have lost a lot of momentum and have even seen periods of outflows. So, the dollar index is definitely something to watch. Sentiment towards the US is not in a particularly strong place, especially given what you might expect in an uncertain world where people would historically be pivoting to the US.


So, just to connect the dots here, if you look at the flows, flows normally come to emerging markets when there is weakness in the dollar index and when there is weakness in the local markets which is the US market, the European market. We are staring at a situation where dollar is weak and US markets are strong. Is that a good enough setup for emerging markets to invite flows or it is a matter of time flows will start going back to America?
Cameron Brandt: I think that the strength of the US market certainly does not feel terribly strong to me despite the lofty numbers. Some of the key indexes and we have been seeing, as I said, a modest but appreciable rotation towards emerging markets in recent weeks.

So, in as much as anything is certain at the moment which is almost nothing, I do think that emerging markets are getting a closer and more positive look again. There is certainly a feeling that the dollar index is going to remain under pressure. If the tax bill goes through, we are looking at another tailwind for deficits here.

So, I do not think you are going to see sort of full-on shifts, that just is not sort of the pattern we have been seeing in flows. But I certainly think that people are going to start to add to their emerging markets exposure during the summer.