WEAFER COMMENT: Fund Flows Monitor – EM surge continues, Russia lags

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By Chris Weafer, Chief Strategist, Ovanes Oganisyan, Strategist, and Iskander Abdullaev, Quant Analyst, Sberbank Investment Research

Investors added another $5.8 bln to EM retail funds in the week ended Wednesday to bring the total invested YTD to $16.6 bln. Russia funds reported a net outflow of $64 mln for the past week, which brings the YTD loss to $93 mln. However, when Russia’s share of the big money inflows to GEM funds is taken into account, the total available for last week was $204 mln and $757 mln YTD.

> Investors bullish on EM equities. EPFR Global’s weekly report showed investors remaining very bullish on the EM asset class’ prospects for gains in 2013. Last week’s net addition of $5.8 bln (0.75% of AUM) was less than the previous week’s record inflow of $7.4 bln, but brings the YTD total to $16.6 bln (2.2% of AUM) and adds to the $50.4 bln received through 2012.
Most of this has come in since the start of September, when the US Federal Reserve announced QE3 and China’s economic trend turned more positive. There is, however, still a reluctance to pick many country-specific bets, whereas $11.6 bln, or 70% of the total YTD, has been allocated to the relative safety of GEM Balanced funds.

> Allocations to some country-specific funds. Investor preference for ETF instruments is also undiminished, with 55% of the allocation YTD invested this way. This is down from the 71% ETF allocation in 2012. Investors, while still sticking overwhelmingly with GEM and ETFs, are starting to pick some country-specific bets, albeit mostly China. China funds have already picked up over $2 bln (3.5% of AUM) in the past three weeks, adding to the $7 bln of inflows in 4Q12. Korea funds were also a favorite in 4Q12, but have seen their popularity slip away in 2013. Turkey funds, albeit much smaller in size, are attracting the most in terms of AUM. Last week, the net inflow of $38 mln equaled 1.37% of AUM and, YTD, the total invested equals 4.1% of AUM.

> Turkey up on net inflows. The relative positive flows into Turkey have meant that the ISE 100 is one of the best performers YTD, with a gain of over 7%. China’s Shanghai Composite Index has not materially benefited from the strong flows and, at mid-session today, is up only 2.2% YTD. In contrast, Russia’s MICEX and RTS indexes are up 4.2% and 4.8%, respectively (also at mid-session) despite this year’s negative fund flows.

> GEM makes the difference. Russia-dedicated funds lost $64 mln (0.45% of AUM) versus a net inflow of $56 mln the previous week, bringing the net loss YTD to $93 mln (-0.7% of AUM). However, net outflows have not dampened positive market performance due to Russian allocation from the big GEM inflows. At end November, the latest date for which data is available, Russian equities accounted for a 6.88% share of GEM. China is the largest component with a 15.3% share, while Turkey accounts for 2.96% and will have also benefited from the indirect allocations. For Russia, this has meant that the aggregate flow has been positive for the past eight weeks, the total available being $1.2 bln. Last week’s aggregate allocation was $204 mln (0.34% of the expanded AUM), down from $495 mln the previous week.

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