By Chris Weafer, Chief Strategist at Troika Dialog.
The weekly equity funds flow report from EPFR Global showed a big jump in new investment into emerging market funds for the week ended Wednesday. A total of $3.5 bln was invested into all EM funds compared to $1.0 bln the week before.
Russia dedicated funds reported their first week of inflows since early July, directly raising $56 mln in the current week compared to a loss of $54 mln the week earlier. However, on an aggregate basis when taking into account the much larger fund allocations within GEM and regional funds, Russia recorded a second straight week of new money allocation. This week that totalled $246 mln, up from only $11 mln the week earlier.
Positive Russia momentum has been building. We have highlighted for several weeks that the portfolio managers within GEM funds have been raising their allocations to Russia and this is usually a very positive lead indicator that country fund investors may soon follow. This week that has finally occurred for the first time since early July. The positive momentum can be maintained and, barring a complete disaster in the euro zone, puts Russia in a strong position to sustain the October equity and ruble rally.
Putting their money where their confidence is. Investors have become increasingly optimistic that a coordinated policy response in the US, Europe and at the G20 level can both prevent debt risk contagion from the eurozone and prevent a slide into recession in developed economies. Last week they raised their bet on an extended EM markets year-end rally with $3.5 bln of new money. That was only the third week of new investment into the asset class out of the past fourteen weeks. Investors withdrew $2.6 bln from the asset class in October, despite the strong global markets rally that month, and cut $20.5 bln from EM funds in the two months before that.
Still playing it relatively safe. Most of the new money is still playing it safe, i.e. via the EM Balanced category rather than making specific country bets. Of the $3.5 bln invested last week, $3.0 bln was placed into the EM Balanced category.
$246 mln invested into Russia. Russia dedicated funds have reported sixteen straight weeks of outflows since early July and that was finally broken this week with a net inflow of $56 mln. That compares with a loss from this fund category of $54 mln last week and a loss of $4.3 bln over the past three months. However, the much bigger pool of money which aggregates these country fund flows with the allocations to Russia within the big GEM funds raised the total new money available to Russia portfolio managers last week to $246 mln or 0.6% of AUM. That is up from the $11 mln net new money the previous week and that was the first net positive week also since early July.
Mixed elsewhere. Amongst the other big country funds it was a mixed picture as investors are still sorting out potential winners for a hoped-for year-end rally. China dedicated funds reported inflow of $153 mln and India funds took in $79 mln. Korea funds lost $121 mln and Brazil funds surprisingly reported net redemptions of $67 mln. Turkey funds reported a small inflow of $11 mln.
Positive EM momentum is building again. Investors have taken some convincing that the threat to EM performance has eased but he momentum has now definitely turned positive and, without a major disaster in the euro zone, we should see a reversal of a substantial amount of the $23 bln withdrawn from EM funds over the past three months. That can be a very positive driver of equity performance in the asset class through this month and into the year-end. 72% of the total new money last came via ETF funds and that is also a very good lead indicator to expect rising traditional fund allocations in the coming weeks.
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