According to a seasoned Bank of America economist who spoke with Reuters, large investors are starting to devote more capital to developing economies as they seek returns. This might signal a structural change in the way they manage their wealth.

According to David Hauner, president of Bank of America’s global emerging markets fixed income strategy, large global fixed income funds—which possess greater clout than those devoted to developing markets—are making “huge sizes” commitments in strategic locations.

The funds are going to nations like Mexico, Brazil, Turkey, India, and Poland who have impressive growth or reform narratives. In Egypt and Nigeria, short-term wagers have also gained popularity.

“I think that is the beginning of a structural story,” Hauner said, adding investors wanted specific country exposures, rather than index products that package together a range of emerging market assets.

“You’re seeing outflows from dedicated (funds) and at the same time people involved in crossover. That is the new thing. I don’t recall that this has ever happened before.”

The flows imply that, in an attempt to support state finances, investors are rewarding certain nations when they enact difficult measures for their citizens, such devaluing their currencies and cutting subsidies.

Furthermore, they contradict highly monitored statistics from EPFR, which indicates that, excluding China, developing market debt funds have withdrew almost $5 billion this year.

According to Hauner, no one data point could adequately represent the investments. Exchange-traded and mutual funds including a predetermined blend of developing economies, frequently led by China, are included in the EPFR statistics.

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However, as fortunes divide among developing nations, with China, for instance, trailing in returns and other traditionally riskier nations, like Egypt, surging following an infusion of funds from the United Arab Emirates and the International Monetary Fund, more investors wish to allocate their capital to specific emerging markets as opposed to using a fund that has a predetermined asset mix.

Suddenly, countries like Vietnam, India, and Mexico are “darlings of investors” because of their unexpectedly good performance, says Alejandro Arevalo, head of emerging market debt at Jupiter Asset Management.

He stated, “Money has been flowing in into these countries,” noting that they have done a good job controlling inflation and setting themselves up to profit from trade tensions between China and the United States.

Conventional flows, he said, would soon reflect the change.

According to Hauner, “puzzle pieces” that show the present cash flows already exist. These include estimates from the Institute of International Finance that depend on balance of payment data.

According to IIF statistics, for instance, investors increased their holdings in developing economies by around $32.7 billion in March, marking the fifth consecutive month of net foreign inflows into these markets overall.

The perception of inflows is further supported by the year-over-year increase in high-yield bonds from Egypt to Pakistan and the market’s assimilation of billions of bonds issued from Turkey to Ivory Coast.

“It just reflects that EMs (are) growing up and that global debt investors want to have a fair share of exposure,” Hauner stated. “Compared to before, they are more stable. However, they are providing yields that are rather appealing.”

(Adapted from Reuters.com)

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