According to reports from EFPR, who collects global fund flow data, Emerging Market equities (EEM, quote) remain an allocation haven for global money seeking rotation out of overpriced and overbought developed market equities.
After a couple weeks of tepid fund flow, but positive nonetheless, Emerging Market fund flows ending the week of May 21 gained an impressive $998m. Emerging Market fund flows have now been positive 7 out of last 8 weeks after a record run of outflows. Dedicated Global Emerging Market (GEM) money was saw +$1.5Bn in flows. Overall, the flows were well distributed but South Africa (EZA, quote), China (FXI, quote), and Brazil (EWZ, quote) outperformed. Overall positioning, according to data we received from UBS, indicates that the most crowded trades are Columbia, Egypt (EGPT, quote), South Korea (EWY, quote) and Poland (EPOL, quote).
Over the past few weeks on our Emerging Money Daily Audio Call, we have highlighted the risks of the overbought and crowded trades in the middle east. Egypt is the largest and most accessible of those markets.We have on the other hand stressed that Korea is one of our top markets based on valuation and EPS outlook.
During this strong run, emerging market funds have gained net 8.4Bn in flows according to EFPR and now YTD outflows are $-27.3Bn but now well off the -$35Bn we saw at the lows.
Speaking of ETF Flows, the trend higher is not surprisingly more pronounced. Emerging Market focused ETF flows have been +$8.9Bn from the lows of fund flows back in late March. Clearly, as emerging markets become a more fashionable allocation with markets “cycling” looking for value and growth away from momentum, ETFs will see more outsized flows in than dedicated and mutual fund money.
Why? Simply because ETFs allow large players that liquidity and diversity to make directional allocation calls. As a hedge fund manager in emerging markets, I have been in numerous meetings with large institutional players who will divulge to me that they have made a bet on a particular country via ETFs to add “portable alpha” to an existing emerging markets investment strategy. Country and GEM ETFs are easier calls to make for non-dedicated investors as they are making a diversified index play and not choosing single names with more volatility and risk inherent.
With negative fund flows since the start of 2013 of -$55Bn, Emerging Market equities still have significant room to outperform on allocations in the next six months. This view, supported with valuation, and other technical data reinforces our view that Emerging Market equities will continue to outperform the SPX as they have since Mid March (+11%), which is not surprisingly about the bottom of the record outflow trend emerging markets endured that left the asset class well oversold.
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