Following a poor performance in December, emerging market (EM) assets look undervalued and could draw investor interest again, analysts say.
"Emerging market assets had a rough month in December and saw outflows of around $8.5 billion," said HSBC rates strategist Himanshu Malik. "But excess liquidity provided by the Bank of Japan and European Central Bank's quantitative easing programs has improved sentiment, and investors are returning – although they are being more selective."
In January, offshore investment into emerging market bonds increased in the majority of EMs, according to a HSBC research note published last Friday. The most notable inflow, of over $1 billion, came from Japan's retail investors.
Institutional investors are also optimistic about the outlook for EM assets, according to a note by Societe Generale head of emerging markets strategy Benoit Anne, published on Friday.
"An overwhelming 74.4 percent of investors had a bullish bias (in February's EM investor survey), which is comparable to the level registered back in March 2014," he said, "and hedge funds are now more bullish than real money investors over the near term."
Mrs. Watanabe's quest for overseas yields
In January, Japanese retail investors poured $428 million into Brazilian bonds, and another $516 million into Singaporean, Mexican, Indian and Indonesian bonds, according to the HSBC note citing Ministry of Finance figures. By comparison they spent $953 million on U.S. bonds.
"Japanese retail investors expect the yen to weaken further and are preemptively placing their money into higher yielding overseas assets," said Nomura FX analyst Motoki Kike.