Global Investing

Signs of growth bets in the fund flows

Just as Germany helps to embolden hopes for a robust recovery in Europe, a look at detailed fund flows data offers more cheer to the optimists.

I’ve been seeing which equity fund sectors saw the greatest net inflows during July, and then filtering the top 20 by flows relative to the sector’s total assets. There’s a clear winner.

According to estimates from Lipper, funds and ETFs in the cyclical consumer goods and services category notched up net inflows of about $1.5 billion, the equivalent of 7.8% of overall assets under management and the largest monthly net inflow for at least ten years. Over the 3 months to end-July, net inflows were at close to $3.4 billion.

In theory, these 300+ funds are global in scope, but it’s probably fair to say this looks mostly like a bet on the U.S. consumer; 11 of the top 20 funds by assets in the category are domiciled there. Recent data has given encouragement to investors, although there are doubts about just how robust sentiment is.

It might be a blunt tool, but if we make an assumption that bets on individual industry sectors can represent a play on resilient growth, then there is further evidence to be considered. In total, seven industry sector fund categories make into that top 20 group by net inflows in July. Banks and financials saw inflows equivalent to 4.64% of latest assets under management; pharma and healthcare 2.20%; IT 1.90%; gold and precious metals 1.67%; utilities 1.27% and natural resources 0.65%.

Tapping India’s diaspora to salvage rupee

What will save the Indian rupee? There’s an election next year so forget about the stuff that’s really needed — structural reforms to labour and tax laws, easing business regulations and scrapping inefficient subsidies. The quickest and most effective short-term option may be a dollar bond issued to the Indian diaspora overseas which could boost central bank coffers about $20 billion.

The option was mooted a month ago when the rupee’s slide started to get into panic territory but many Indian policymakers are not so keen on the idea

So what are the merits of a diaspora bond (or NRI bond as it’s known in India)?

Turkey’s central bank — a little more action please

In the selloff gripping emerging markets, one currency is conspicuous by its absence — the Turkish lira. But this will change unless the central bank adds significantly to its successful lira-defensive measures.

Hopefully at today’s policy meeting.

Like India or Indonesia which have borne the brunt of the recent rout, Turkey has a large current account deficit, equating to over 5 percent of its economic output. But what has made the difference for the lira is the contrast between the Turkish central bank’s decisive policy tightening moves and the ham-fisted tactics employed by India and Brazil.  (We wrote here about this).  See the following graphic (from Citi) that shows the central bank has effectively raised the effective cost of funding by 200 basis points to around 6.5 percent since its July 23 meeting.

 

Guillaume Salomon, a strategist at Societe Generale calls Turkey the “success story” given the relatively stable lira and expects the bank to raise the upper band of its interest rate corridor by another 50 basis points at least. He says:

Pakistan, Nigeria, Bulgaria… the cash keeps coming

The frontier markets juggernaut continues. Here’s a great graphic from Bank of America/Merrill Lynch showing the diverging fund flow dynamic into frontier and emerging equity markets.

What it shows, according to BofA/ML  is:

Frontier market funds with year-to-date inflows of $1.5 billion have decoupled from emerging markets ($2.1 billion outflows year-to-date)

In other words, frontier fund inflows since January equate to 44 percent of their assets under management (AUM), the bank says.

Russia — the one-eyed emerging market among the blind

It’s difficult to find many investors who are enthusiastic about Russia these days. Yet it may be one of the few emerging markets  that is relatively safe from the effects of “sudden stops” in foreign investment flows.

Russia’s few fans always point to its cheap valuations –and these days Russian shares, on a price-book basis, are trading an astonishing 52 percent below their own 10-year history, Deutsche Bank data shows.  Deutsche is sticking to its underweight recommendation on Russia but notes that Russia has:

“become so unpopular with the investor community that it is a candidate for the ‘it’s so bad it’s good’ club as evidenced by the very cheap valuations and long-term  underperformance.

Emerging markets funds shun Brazil, South Africa

Global emerging markets equity funds have cut average weightings to Brazil and South Africa for the fourth straight quarter, according to the latest allocations data from fund research firm Lipper.

You can see a full interactive graphic of the allocations data here or by clicking on the snapshot below.

The average allocation to Brazil has fallen by 1.75 percentage points over the past year to stand at 11.6 percent of portfolios by the end of the April-June 2013 quarter. South Africa’s average weighting has fallen to 6.0 percent from 7.3 percent in the second quarter of 2012.

Russia’s starting blocs – the EEU

The course is more than 20 million square kilometers, and covers 15 percent of the world’s land surface. It’s not a new event in next month’s IAAF World Championships in Moscow but a long-term project to better integrate emerging Eurasian economies.

The eventual aim of a new economic union for post-Soviet states, known as the Eurasian Economic Union (EEU), is to “substitute previously existing ones,” according to Tatiana Valovaya, Russia’s minister in charge of development of integration and macroeconomics, at a media briefing in London last week.

That means new laws and revamping regulation for “natural monopolies” in the member states, streamlined macroeconomic policy, shared currency policy, new rules on subsidies for the agricultural and rail sectors and the development of oil markets.

The world of sovereign bond guarantees

Just as Hungary is worrying foreign investors with a plan to help households laden with foreign currency mortgages – likely to prove expensive for its banks – its trade bank has come up with an interesting structure for a planned bond.

State-owned Eximbank has been holding a roadshow this week for a two-part bond, with one part of the bond guaranteed by the World Bank’s risk insurance arm, Miga.

It’s unusual for Miga, which has been operating since 1988, to guarantee sovereign debt.

BRIC shares? At the right price

Is the price right? Many reckon that the sell off in emerging markets and growing disenchantment with the developing world’s growth story is lending fresh validity to the value-based investing model.

That’s especially so for the four BRIC economies, where shares have underperformed for years thanks either to an over-reliance on commodities, excessive valuations conferred by a perception of fast growth or simply dodgy corporate governance. Now with MSCI’s emerging equity index down 30 percent from 2007 peaks, prices are looking so beaten down that some players, even highly unlikely ones, are finding value.

Societe Generale’s perma-bear Albert Edwards is one. Okay, he still calls the bloc Bloody Ridiculous Investment Concept but he reckons that share valuations are inching into territory where some buying might just be justified. Edwards notes that it was ultra-cheap share valuations in the early 2000s that set the stage for the sector’s stellar gains over the following decade, rather than any turbo-charged economic growth rates. So if MSCI’s emerging equity index is trading around 10 times forward earnings, that’s a 30 percent discount to the developed index, the biggest in a very long time. And valuations are lower still in Russia and Brazil.

Josh Lyman and fund managers’ Gordian knot

“We got momentum, baby! We got the big mo!”

Josh Lyman in the TV series ‘The West Wing’ may have wanted it in a presidential election race, but what of fund management companies? Do asset managers want investors to buy and sell their products as the momentum of fund returns ebbs and flows?

I began wondering about this when faced with comments from two well-respected figures in the funds industry. First, Marcus Brookes, Head of Multi-Manager at Cazenove Capital, so no slouch when it comes to picking funds:

“Some fund managers’ and IFAs’ approach to picking funds is usually quantitative to begin with and it is obvious most guys begin with the stuff that has just done well. It also means you are discounting three-quarters of the sector.”