In recent months, there has been a significant shift in global flows towards emerging markets (EM). According to UBS Equity Research, five key indicators are driving this trend: high-frequency flows into EM debt and equity, US Treasury International Capital (TIC) data, the UBS Quant team’s equity crowding data, resident EM outflows into foreign portfolio securities, and changes in EM foreign exchange (FX) deposits.

To gain a deeper understanding of this trend, let’s examine each of these indicators in detail. High-frequency flows into EM debt and equity have been increasing, with US TIC data showing a notable uptick in investment in recent months. The UBS Quant team’s equity crowding data also supports this trend, indicating that US investors are becoming more bullish on EM equities.

Resident EM outflows into foreign portfolio securities have also been a significant factor, with China’s northbound flows reaching record turnover. While retail flows have not yet reached overheated levels, there is evidence to suggest that institutional investors are becoming more active in the EM equity market.

Changes in EM FX deposits have also played a role in the rotation towards EM, with some countries experiencing significant appreciation in their currencies. However, local investor outflows have been more persistent, which could potentially hinder the medium-term growth of EM FX.

Despite these trends, UBS remains constructive on local debt flows, which are dominated by high-yield bonds. The firm believes that the attractive yields offered by these bonds will continue to attract investor interest, particularly in light of the current low-interest rate environment.

The rotation towards EM is a complex phenomenon that can be understood through a careful examination of multiple indicators. While some trends, such as high-frequency flows and institutional investor activity, support the growth of EM equities, others, such as local investor outflows, may pose challenges to their medium-term development. As always, it is important to stay informed and adapt one’s investment strategy accordingly.