Trading the Globe: fund flows signal an emerging markets "buy"

Massive amounts of money are pouring back into emerging markets funds. Conventional wisdom is that this is a buying signal. We lay out the numbers on Trading the Globe.

We saw $30 billion leave the emerging markets asset class in the first 10 months of this year — compared to a record $40 billion outflow in the disasters of 2008 — so any move back is welcome.

As it is, the $3.5 billion that came back to emerging funds and ETFs was the most aggressive allocation of new money to these markets in seven months. Add that to last week’s $1.6 billion in fresh capital, and we could be looking at a sustainable rally here.

Remember, when markets finally turned after the 2008 crash, emerging markets embarked on their biggest rally in history.

Valuations are at a low and at this point, global hedge funds are underweight these stocks.

There is still a lot of damage to overcome here after 12 weeks of net outflows, the longest losing streak for the asset class since mid-2003.

But since retail investors have historically been the lambs to the slaughter when the trend changes, is this time any different?

Asia needs to turn right for this move to be sustainable. The giant funds are still heavily weighted toward China, Korea and Taiwan, with a full 42% of EEM (quote alone invested in these three countries.

We need Asia to follow through and we need Asia to lead here. The top three names in the area we are watching are China Mobile (CHL, quote), Taiwan Semiconductor (TSM, quote) and Samsung, which unfortunately does not trade much in the United States.

Countries that still look under-owned include South Africa (EZA, quote), Turkey (TUR, quote) and Mexico (EWW, quote).

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