Emerging market equity funds post record inflows

A pull back from emerging market equity funds two weeks ago wasn't enough to make a dent on the overall inflows to these portfolios recorded during the second quarter. Emerging market equity funds absorbed net inflows of $26.5 billion between April and June of 2009. That surpasses the previous record of $22.4 billion in net inflows in the fourth quarter of 2007.

The data from Massachusetts-based EPFR Global, which tracks more than $10 trillion in assets worldwide, is the latest confirmation that emerging markets are fast becoming the fallback of investors for several reasons. Some see emerging markets -- notably led by China -- recovering faster from the global financial crisis than developed markets. Some are attracted by valuations, which have already risen in recent months but continue to be low when compared with pre-crisis highs.

The most recent Merrill Lynch survey of global fund managers, conducted in early June, shows that global emerging markets remain the most sought-after markets worldwide for equity allocations. A net 37% of respondents are overweight in global emerging markets. There are hints, however, that the euphoria surrounding emerging markets might have peaked because, in May, a net 40% were overweight in global emerging markets. That survey takes the balance between the bullish and bearish views for each survey question to come up with a net figure.

"Emerging markets in general still have higher growth characteristics and greater profitability than developed markets," says Ray Prasad, a Boston-based senior global emerging markets portfolio manager at Batterymarch Financial Management.

Prasad notes that two-year expected earnings growth is currently 11.8% for China and 10.2% for India, while the figures are even higher for Taiwan and South Korea, at 19.5% and 21.5%, respectively. That's significantly higher than his estimated 7.5% earnings growth for the MSCI World Standard Index over the next two years.

Meanwhile, emerging market equity funds tracked by EPFR Global received net inflows of $972 million during the final week of June, capping a record-breaking quarter for most of these funds. China's aggressive efforts to sustain its gross domestic product (GDP) growth at around 8% prompted investors to increase their exposure to riskier assets, EPFR Global notes.

China was again the focal point for investors, with its manufacturing data and loan growth encouraging fresh flows into China and Asia ex-Japan equity funds. China equity funds, which posted a net outflow of $311 million during the first quarter, took in a net inflow of $3.8 billion in the second quarter of 2009, while Asia ex-Japan funds absorbed over $23 billion in net inflows.

"We believe China will continue to perform well as the country has demonstrated high levels of fiscal and monetary flexibility," says Colin Ng, the Hong Kong-based regional head for Asia-Pacific equities at MFC Global Investment Management. "The emergence of the urban middle class will also drive domestic consumption higher."

China's promising purchasing managers' index (PMI) level is also a key factor in boosting sentiment for that market. China's PMI rose slightly to 53.2 in June from 53.1 in May, marking the fourth straight month that it has been above the expansionary threshold of 50.

Jing Ulrich, Hong Kong-based managing director and chairman for China equities at JP Morgan, notes that China's stimulus programme is having a demonstrable effect on domestic spending and that, in turn, has resulted in increased manufacturing activity.

"As soon as the China PMI started to improve markedly, we started to build exposure to sectors sensitive to fixed asset investment and consumer spending due to various fiscal measures there," says Simon Godfrey, a Hong Kong-based investment specialist for Asia ex-Japan equities at Fortis Investments.

The gain in emerging market equity funds added to the losses in money market funds. EPFR Global data show that money market funds posted net outflows of $137.5 billion in the second quarter, while another US, Europe and Japan equity funds posted a combined $7.6 billion in net outflows.