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It’s Friday, which means it’s fund flows day. After weeks dominated by outflows from emerging market funds, investors finally appear to be piling back in. Data from EPFR showed inflows totaling $2.6bn in the week to March 30, the highest level in months. It’s also a big switch around from last week’s $2.7bn exit.
What’s driving the turnaround? There appear to be a few factors at work.
For one, inflation across emerging markets has softened a touch – or at least it hasn’t run away. Indonesian inflation slipped back off 7 per cent in March, easing to 6.6 per cent. China too appears to be getting a handle on rising prices. Inflation in developed markets, however, is still rising.
Then there’s the basic point: good performance begets good performance. After significantly underperforming developed markets for weeks, emerging markets are starting to gain ground again. Investors switched funds out of EM and into DM in recent weeks, but that cycle may have run out of steam, as Chris Weafer at Uralsib notes.
Investors are increasingly taking the view that the under-performance of emerging market equities relative to developed markets is now overdone and that the current combination of growth and valuation again offers an attractive entry point that also compensates for the asset class risks.
Another key factor is the performance of the dollar. The greenback is highly correlated to emerging markets – when it goes up, they go down. The recent period of dollar strength has reversed in recent days, making EM a buy.
The big winner, once again, is Russia. Over $600m went into Russian funds last week – 75 per cent of which came through ETFs. Inflows into Russia so far this year total $3.5bn, compared to $3.4bn in 2010 and $2bn in 2009.
Greater China funds were the biggest winners in Asia, with South Korea and regional funds also seeing modest inflows. Elsewhere, India and Latin American continue to suffer.
There hasn’t been a big reversal of the call from investment banks to buy developed markets over emerging markets, so this may not be the beginning of a trend. But the number is big enough to say that emerging market bulls had a good week.
Related reading: CEE flows: looking up, beyondbrics Fund file: Out of Africa, beyondbrics EM equities: small is beautiful, beyondbrics
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