A shocking plunge in one of its key components may dampen, but not crush, Wall Street's favorite investment trade of the last few months: emerging markets.
Brazilian stocks collapsed Thursday on news of a fresh political scandal that jeopardizes the new administration's reform plans. But in the week ending just one day before the drop, investors accelerated purchases of emerging-market stocks, pouring the most money into those assets versus other major stock markets.
The $3.9 billion of emerging-market inflows was the most in 39 weeks and nearly quadrupled the $1.1 billion of European stock purchases last week, contrasting with weeks of outflows from U.S. and Japanese stocks, according to EPFR Global data cited in a Bank of America Merrill Lynch report.
But market strategists remained mostly optimistic about the hot emerging-markets trade, even as Brazilian stocks tumbled Thursday.
"I think it's a good day for trading opportunities," said Kathryn Rooney Vera, head of macro research and emerging markets strategy at Bulltick, a brokerage and asset manager. "Any spillover to EM that really have nothing to do with the Brazilian president's scandal are a buy," she said Thursday.
Emerging market countries include Brazil, China, India and Russia. Despite a historical record of high political risk and sensitivity to volatile commodity prices, emerging market assets have become a major attraction for U.S. investors looking for better returns than the sluggish domestic market.
The trade has paid off so far. This year, the iShares MSCI Emerging Markets ETF (EEM) has posted more than double the returns of the S&P 500.
But on Thursday, Brazilian stocks fell 8.8 percent in their worst day since 2008 after the O Globo newspaper reported that Brazilian President Michel Temer in March allegedly discussed bribing a witness to stay silent in a massive corruption case. Temer said he will not resign and will prove his innocence in the Supreme Court, according to a Reuters report.