Amid warming sentiment towards emerging markets, caution is needed

LAST year, emerging-market (EM) equities reversed a multi-year streak of underperformance that has dogged the asset class since 2011.

The reasons for poor returns are well known - depressed EM currencies against a resurgent greenback, uncertainties over the restructuring of major EM economies such as China and Brazil, and a sharp de-rating of stocks thanks to a series of earnings downgrades. This year, however, even with the US Federal Reserve's recent rate hike of 25 basis points - and a signal of two more hikes in the pipeline this year - EM equities have continued to climb. Year-to-date, the MSCI EM equity index has chalked up returns of 12 per cent, outperforming the S&P 500's 4.5 per cent return.

To be sure, this is a welcome turnaround for those who have persisted through the fallow years between 2011 and end-2015 when EM equities generated a return of -11 per cent, compared to 56 per cent for the MSCI World index and 95 per cent for US equities. Fund flows have picked up. Data from the Institute of International Finance (IIF) shows inflows of US$80 billion in February, bringing year-to-date inflows to US$145 billion, a huge turnaround from the inflow of US$21 billion in Q4 2016.