Emerging markets stocks are so far weathering the storm in developed markets stocks and bonds in the past few days, though action in U.S. markets in the next few days may test investor appetite for the asset class.
Asian stock markets are expected to be pressured lower on Tuesday after the U.S. benchmark S&P 500 stock index fell 4.1 percent on Monday, its largest daily percentage drop in 6-1/2 years.
By contrast the MSCI index of emerging market stocks fell only 1.75 percent, the largest drop in just over two months.
Most of the weakness in equities is expected to remain contained in U.S. markets, as investors change asset allocations due in part to a stronger than expected string of economic data.
U.S. economic growth was running at an annualized 2.6 percent in the fourth quarter of last year, and on Friday the U.S. Labor Department reported the unemployment rate at a 17-year low of 4.1 percent, but wages saw their largest rise in more than eight years.
Friday's data revived fears of inflation and a faster pace of Federal Reserve interest rate increases this year, pushing up U.S. benchmark bond yields to four year highs. "The reason for the (U.S. stocks) selloff is because things are better than people thought and they want to reevaluate allocations between equities and bonds," said Erin Gibbs, equity chief investment officer at S&P Global Market Intelligence in New York.
The relatively mild response in emerging markets speaks to traders confidence that the U.S. decline is a correction to stretched equity valuations rather than weakness in economic growth, corporate earnings or financial system strains, analysts said.
"Over the last year we’ve been adding to emerging market value stocks, which is an asset class that is far more attractive than anything else we can find," said Catherine LeGraw, a member of the asset allocation team at Boston-based asset manger GMO.
LeGraw said that she expects that emerging market stocks will gain more than 6.0 percent this year after adjusting for inflation, a gain that “no other asset class comes close” to matching.
However, Monday data from the Institute of International Finance (IIF) show outflows from emerging market portfolios were the highest since the U.S. presidential election in November 2016, with bonds being hit less hard than equities.