Trade-war fear causes a shift in emerging-market flows

Bloomberg

When it comes to US-China friction, Asia’s loss is turning into Latin America’s gain.
The worsening relationship between the world’s two biggest economies is driving capital out of Asia into nations such as Brazil and Mexico, where the March rout has left valuations too low to ignore. Investors are now paying the most in three years to own Latin American stocks rather than Asian ones. Most upgrades to emerging-market profit forecasts are for Latin American companies, and exchange-traded fund flows (ETFs) are moving in the same direction.
The shift shows how Asian assets are becoming more vulnerable to bouts of antagonism between Washington and Beijing, especially in the run-up to the US elections. Latin America, meanwhile, is receiving a boost from recovery in commodity prices and efforts to keep economies going despite spread of Covid-19.
“You could see it in the context of a leadership hand-off from Northeast Asia, which has had the most success defeating the virus, to Latin America, which hasn’t yet brought cases down so much, but is already seeing activity improvements,” said Morgan Harting, who helps manage $1.2 billion in AllianceBernstein’s EM multi-asset fund in New York. “Investors seem very focused on activity data.”
Since April 30, the rebound in the benchmark MSCI Emerging Markets Index has been led by Latin America. Returns from the region are beating those of Asia by four to one.
The price-to-estimated-earnings ratio of Latin American stocks relative to emerging Asia fell to a six-year low after the selloff in March. But by the end of May, it had jumped to the highest level since February 2017.
Earnings estimates are rising the fastest in Latin America, beating both the emerging Europe, Africa region and Asia.
Resilience in Latin American currencies is helping to underpin this growth.
Exchange-traded funds listed in the US that invest in Asian bonds and stocks have suffered net sales of $1.4 billion in the past two weeks through May 29, extending a streak of outflows that started in February. Similar ETFs investing in Latin America have attracted about $60 million of funds over the two-week period, despite the region
becoming the new coronavirus hot spot.
Signs of a recovery in Latin America are still threatened by the worsening virus outbreak. Even as some parts of Brazil, including epicenter Sao Paulo, have begun reopening after lockdowns, the country reported a record number of daily deaths from Covid-19 on Wednesday. Mexico saw its first daily increase of more than 1,000 deaths.