Global Investing

The annus horribilis for emerging markets

Last year was one that most emerging market investors would probably like to forget.  MSCI’s main equity index fell 5 percent, bond returns were 6-8 percent in the red and some currencies lost up to 20 percent against the dollar.  Here are some flow numbers  from EPFR Global, the Boston-based agency that released some provisional  annual data to its clients late last week.

While funds dedicated to developed markets — equities and bonds –  received inflows amounting to over 7 percent of their assets under management (AUM), funds investing in emerging stocks lost more than 6 percent of their AUM.

In absolute terms, that amounted to a loss of $15.4 billion for emerging equity funds , banks said citing the EPFR data.

Emerging debt funds shed just over $14 billion in 2013.

On the bright side,  the 2013 outflows only partially reversed the bumper flows from the previous year, when emerging bond and equity flows tracked by EPFR Global took in a combined $88 billion. Also, outflows moderated for the second week in a row in the week to December 31 after the Fed’s mid-December announcement that it would start winding down its stimulus from January.

US investors prop up emerging equity flows

U.S. mutual fund investors are ploughing on with bets on emerging market equities, according to the latest net flows numbers from our corporate cousins at fund research firm Lipper. Has no one told them there’s supposed to be a massive sell-off?

August was the 30th straight month the sector has seen net inflows, and the 9th straight month of net inflows above $1 billion. Sure, there’s a downward trend from the February peak, but the resilience of demand is notable given doom-laden headlines about how EM markets will fare once the Fed feels its generosity is no longer required.

Of course, the popular image of mutual fund investors is as a perennial lagging indicator for allocations trends, and the stage may be being set for a sharp turnaround this month. However, U.S. investors have already been offloading their bets on emerging debt, with funds in the sector seeing net outflows of $2.6 billion, or 7.5% of total assets, in the three months to end-August.

Rotation schmotation

We’re at risk of labouring this point, but there has been some more evidence that this year’s equity rally has not been spurred by a shift away from fixed income. The latest data from our corporate cousins at Lipper offer pretty definitive proof that there has been no Great Rotation, at least not from bonds to stocks.

Worldwide mutual fund flows numbers for February showed an overall move into equity funds of more than $22 billion, and a net flow to bond funds of about half that. Over 3 months it’s a similar story, with a net inflow to equities of about $84 billion while bond funds sit close behind at about $75 billion. Little wonder then that there is some evidence at least of movements out of money market funds.

In fact, maybe HSBC called it about right last week. In a note, their cross-asset strategists reckoned a pick-up in economic growth might support a ‘minor’ cyclical rotation into equities from bonds, but a longer-term structural shift between the two asset classes as part of a ‘Great Rotation’ was less likely.

Winners, losers and the decline of fear

Lipper has released its monthly look at fund flow trends in Europe, and as ever, it throws up some intriguing results.

August saw bond funds again dominate inflows, pulling in a net 20.8 billion euros and just a tad down on July’s record. Stocks funds continued to suffer, as British equity products led the laggards with close to 2 billion euros withdrawn by clients over the month. North American equity funds and their German counterparts also saw big outflows.

Looking regionally, the Italian fund sector continues to show some surprising strength. Net funds sales there topped the table for the second month running. You can see Lipper’s heat map of sales and AuM below:

Healthy flows into money market funds

Despite concerns about contagion from the euro zone, investors injected fresh funds into U.S. mutual funds, including money market funds, latest weekly flow data from Lipper shows.

The week ended Nov 16 saw a net $10 billion inflow into mutual funds, including ETFs, while investors were net buyers of equity funds with flows at $2.8 billion. Equity funds, including ETFs, witnessed their fifth consecutive week of net inflows.

Reflecting jitters over the debt crisis however, investors injected $2.8 billion into taxable fixed income funds and for the second week in a row bought into money market funds to the tune of $2.9 billion.