Fund Flows to Emerging Markets Soar in Q4

Published January 5, 2011


Fund flows to emerging markets soar in Q4

But some analysts now see stocks from developed markets as a safer 2011 bet

By NEIL BEHRMANN

IN LONDON

ASIAN and emerging market equities continued to find favour in the final months of 2010, but a growing number of analysts believe that developed market stocks could well be a safer way to go for investors this year.

Latest data from EPFR Global, an international fund flow consultant, show that net investment into Asian and emerging market equity funds surged in the fourth quarter.

Despite the inflows, however, total purchases of Asia (excluding Japan) equity funds declined to US$21.5 billion in 2010 from US$26.5 billion in 2009.

Moreover, almost half - notably US$10.2 billion of Asian inflows in 2010 - occurred in the fourth quarter.

Investment in global emerging market equity funds rose to a remarkable US$62 billion in 2010, with about a third of the inflows taking place in the fourth quarter of last year.

Including Asia, Latin America, Eastern Europe, Middle Eastern and African specialist equity funds, the inflows were a whopping US$92.1 billion in 2010, up from a similarly exceptional US$83.3 billion in 2009.

'Of the four major emerging markets fund groups only the diversified global emerging markets equity funds set a new record,' said Ian Wilson, managing director, fund data, at EPFR Global. These funds accounted for two-thirds of emerging market equity flows.

'Asia ex-Japan equity funds again absorbed the second largest amount of fresh money, but flows slipped off their 2009 pace as concerns about China's response to over-investment, inflation and asset bubbles dogged sentiment towards the region on and off all year,' Mr Wilson added.

Although there were much improved flows into US funds, helping the S&P 500 index and other indices close at the highs of the years - albeit with some window dressing - there were still sizeable outflows during the year.

Withdrawals in previous quarters from Japan specialist funds were reversed in the final quarter. There was a modest inflow with investors taking a contrary view about the Tokyo market's prospects.

Indeed, Japan equity funds extended their longest inflow streak since a 14-week one that ended in late March, according to EPFR Global.

A weaker yen and yet another stimulus package brightened the outlook for Japanese exporters and consumers.

The crisis in Europe predictably caused outflows in the fourth quarter. Outflows from European funds were US$22.1 billion in 2010 compared to inflows of US$1.24 billion in 2009.

German equity funds, however, enjoyed a record year as the nation was the best performing market in Europe, helped by a jump in exports and the flight to safety.

Despite inflows of US$28.4 billion into developed market funds in the fourth quarter, total outflows for the year amounted to US$62.4 billion in 2010 following redemptions of US$74 billion in 2009.

Flows into commodity funds soared to US$29.3 billion in 2010 following net investment of US$20 billion in 2009.

Fourth-quarter fresh money into these funds amounted to 41 per cent of the total inward investment in 2010 as growing numbers of institutional and retail investors anticipate inflation.

Traders within metals and other commodity markets caution that a dangerous bubble is developing in these markets and China's anti-inflation moves could end the speculation, they warn.

Funds involved in the healthcare/biotechnology sector again suffered the biggest redemptions among the major sector funds. The long-running political battle over healthcare reform in the US did these funds no favours, according to EPFR Global.

Efforts by European governments to get their finances in order also raised the spectre of cuts in reimbursement rates and publicly supported services.

Despite withdrawals from a bloated US bond funds in the fourth quarter, inflows into global emerging markets and high-yield bonds meant that investment into bond funds overall were still US$29.8 billion in the fourth quarter, boosting the annual total to a high US$372 billion compared with US$303 billion in 2009.

Bond funds have benefited from almost zero money market rates and outflows from money market funds, but the big danger is historically low yields and potential inflation from the dangers of loose monetary policies in the US, UK and Europe.