By Chris Weafer, Chief Strategist at ING in Moscow.
The total volume of money invested into emerging market (EM) funds last week was relatively low, even for midsummer, as investors prudently remained on the sidelines while waiting for a resolution of the US debt talks. But, although low, the net flow remained positive as a majority of investors expect a deal ahead of the default deadline. Russia funds reported a small ($13 mln) outflow for the week, bring the net loss for July to a modest $158 mln. Year to date, Russia funds are still well ahead of other big EM country funds with a net inflow of approx $3.2 bln while others are still showing net redemptions.
Investors are on the sidelines. The weekly equity fund flow report from EPFR Global showed that a total of $266 mln was invested into the EM asset class for the week ended Wednesday. That is a big improvement over the net redemption of $1.1 bln the previous week but still a
relatively modest sum compared to the average weekly intake. Investors are clearly hopeful that the US debt default will be avoided but are taking the prudent approach while waiting. The total invested into EM in July was $1.39 bln, down from the $1.87 bln invested in June and the $11.1 bln invested in the best month, which was April.
Playing the fund selection safely. Investors continue to adopt a safety first approach and are concentrating most new money into the EM Balanced fund category. Last week these funds attracted $388 mln. That was better than the $484 mln redemption of the previous week but less
than the $1.13 bln the week before that. Through July, the total invested in this category was $1.8 bln, down from the $2.1 bln of June. BRIC theme funds are almost dead as an asset class having reported redemptions in every week of 2011 bar one.
Russia’s relative strength provides little comfort. Amongst the country specific funds, Russia funds reported a small outflow of $13 mln. That was, however, the third straight week of redemptions and the fifth out of the past six weeks. The improving macro backdrop, high
oil revenues and cheap valuations provide no comfort against the threat of global recession should the US default on its debt. The hope is that, once the debt issues are resolved, investors will again focus on the fiscally stronger and faster growing developing economies, such
as Russia, and inflows will resume. For now, we wait on the sidelines. Russia funds lost $158 mln in July and that was better than the net redemption of $470 mln in June.
Flows elsewhere were equally modest. China funds lost $99 mln last week (inflow of $188 mln in July and +$684 mln in June) and India funds lost $98 mln (-$251 mln in July and -$484 mln in June). Brazil country funds reported a positive flow for the first week in six, attracting $73 mln last week to cut the net loss in July to $135 mln. Turkey funds were almost flat last week with a net inflow of $3 mln to cut the net redemption for July to $15 mln (-$115 mln in June).
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