Emerging markets log 17th straight week of inflows

Inflows into emerging market (EM) equity funds continued for the 17th consecutive week – the longest streak since the last quarter of calendar 2010 – as investors continued to buy into Asia and GEM funds on the back of reduced US fiscal cliff fears and better growth prospects in Asian countries like China and India.

Of the $5.1 billion inflows into equities last week (ending January 3), emerging market equity funds received $3.4 billion.

Jitendra Panda, head of sales-broking at Future Capital Securities attributed the flows to lower growth elsewhere and central banks reducing interest rates. “There are few alternatives to the growth seen in emerging markets, which is helping inflows into countries like India. There is also a yen carry trade at play, in addition to liquidity from QE3 (the third round of quantitative easing by the US Federal Reserve),” he said. Yen carry trade involves borrowing in the Japanese currency at low rates to invest in higher yielding assets elsewhere.

Sakthi Siva, head of GEM and Asian equity strategy, Credit Suisse, believes the upside has to do with the huge gap seen between index prices and earnings per share (EPS) in China and India. “Index for both MSCI China and India are 45-47% below EPS, while in 2007 in both cases it was 40–50% above EPS. While some of this gap is because, in the case of China and India, there are signs of a structural decline in ROE. But given the sheer size of the gap, we do believe these markets potentially offer more upside,” she wrote in a report last week.

China equity funds received net inflows of $453 million last week, while India funds took in $103 million, as per EPFR Global, a US-based firm that tracks flows and allocation of traditional and alternative funds domiciled globally.

Experts see the momentum in emerging market flows continuing in the near term. “(Fiscal) Cliff deal should underpin flow momentum until the market re-centres its attention on deficit reduction. Most of the expenditure cuts in the US will not kick in before March 1, giving Congress and President Obama another two months to thrash out an agreement on spending and raising the debt ceiling,” wrote Jeremy Tan and Ong Seng Yeow of Maybank Kim Eng in a report on Monday.

Christopher Wood, managing director and chief strategist at CLSA, too, has India amongst the top picks for the Asia ex-Japan region. “The main country bets in the portfolio are India and emerging Asean, which represent 31% and 30% of the portfolio, respectively. The portfolio continues to be primarily geared to the domestic story,” he said in a Greed & Fear report dated January 3.