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Nigeria is mired in its worst recession for 25 years. Militant attacks are a constant threat, dollars are scarce, and the currency is weakening. And no one seems to know exactly where the country's 74-year-old president is. Yet proving that domestic crisis doesn't matter when emerging markets are in favour, investors overlooked all of that last week to buy Nigeria's new bond. The sale was the latest sign of a rally that has left developing market stocks, currencies, and bonds enjoying a remarkably strong start to the year.
Yields in emerging market bonds have fallen, while stocks are up 8%, comfortably outpacing developed world peers. One explanation that may be the return of international money. After removing billions of dollars from emerging markets in 2016, investors are now pouring it back in, allocating over $1 billion to equity funds in the last week, and $2.5 billion to bonds.
Fund houses that focus on emerging markets like to argue that developing economies will eventually replace developed markets on the global totem pole, but that's the long-term view. Day-to-day investment still depends largely on external factors. Last year, talk of fiscal spending and tax cuts in the US prompted sharp outflows from developing world assets, with $5 billion withdrawn from emerging market equities the week after Donald Trump won the election.
Mr. Trump has vowed to make a phenomenal announcement on tax reform soon. If market focus moves back to US growth, investor demand for emerging markets could prove as elusive as Nigeria's president.
