(from our Tactical report of 8th November 2016)

Flows to EM equities have been high lately (3m flows over last 2 years to EM ETFs are in their 80th percentile – chart below).

img1Source: Macrobond, Bloomberg and Variant Perception

The rise in the USD is a risk to these flows, as we are already beginning to see.  The next chart shows that rises in the USD tend to lead to falls in inflows to EM equities.

img2Source: Macrobond, Bloomberg and Variant Perception

Inflows are declining today as the dollar has strengthened.  Flows ultimately effect prices, and we can see in the bottom chart that rises in the dollar lead to EM vs DM equity underperformance.  Our EM-DM liquidity indicator still favours EM over DM, but investors should be mindful that a rising dollar is the biggest risk for this theme.

img3Source: Macrobond, Bloomberg and Variant Perception