Flows into emerging markets have increased over the past six months at the greatest rate since before the Asian financial crisis, but most of those funds have skipped Asia in favour of Latin America and Russia. But according to one EM fund manager, Asia could see its share of inflows should events in Brazil go wrong for investors.

Since the Asian financial crisis, emerging market investment has been a fringe business, but that changed markedly after the collapse of Enron's share price. Since then, fund managers report, flows have increased into emerging market debt as well as equities. Raphael Kassin, head of emerging markets fixed-income at ABN Amro Asset Management in London, currently manages $500 million in EM debt portfolios but virtually nothing is invested in Asia. He says that could change, however, depending on the outcome of elections in Brazil.

"Enron was a gift to the asset class," Kassin says. "What it demonstrated was that corruption exists in all countries, including the United States." Moreover, Enron is turning out to be perhaps not the exception but the rule: Tyco and Adelphia are two high-profile successor cases. But if the risk of corruption is more uniform than previously assumed, investors are still not getting much yield in developed markets compared to emerging ones. The comparative risk of investing in the OECD countries is greater than the comparative return.

In fact, emerging markets are even cheaper today than before the Asian financial crisis, which in Kassin's view is a complete anomaly. Five years ago, typical EM sovereign debt on the JPMorgan EMBI Latin index traded 350 basis points over US Treasuries; today they can trade around 770 bp over. "Emerging market countries are now fundamentally better, and much cheaper," Kassin says. "If you had a million bucks to invest, would you rather put it into the next Enron, or Petrobas?"

Plenty of money has headed into Asian equities; Thailand is up 44% and Indonesia û Indonesia! û is up 74% in dollar terms this year. But Kassin has kept his bond funds out of the region. He says it is too expensive: "When the Philippines was 600 basis points over Treasuries it was fantastic, but now it's just 200 basis points over, while Russia is 500 basis points over. But Asia's fundamentals are great, so I think it's been of interest to cross-over investors more than emerging market investors."

That could change if the Brazil situation sours. The leftwing Workers Party's candidate, Luiz Inacio Lula da Silva, has a strong chance of winning the presidential elections in October. The possibility has already weakened the real and boosted spreads on Brazil's short-term debt. Kassin says if Lula wins it could create a Latin American contagion that will force emerging market players into Asia, which is stable.