Fund Flows Monitor – Positive EM Flow Trend Breaks

March 1, 2013

 

Sberbank Investment Research

Investors have added new money to EM retail funds every week for nearly six months. That positive trend finally broke last week as the balance of sentiment shifted toward concern that the Eurozone crisis and/or the failure to resolve the US sequester may dampen global growth expectations for 2013 and hurt earnings in emerging markets.

The first net loss for EM funds in almost six months. The weekly fund flow report from EPFR Global shows that investors withdrew $1 bln (0.1% of AUM) from EM funds last week. While this is a relatively small sum compared with the $61 bln added over the past 12 months, it is the first negative result in almost six months. The question now is whether this small net redemption will lead to a bigger outflow in coming weeks or whether last week’s action was a modest blip. The answer will depend to a great extent on how markets react to the unfolding political drama in Italy and whether US legislators indicate a coming compromise or a partisan entrenchment. Thus, this coming week will surely be highly nervous in emerging markets.

GEM funds nearly remained positive. For the past week, investors added a modest $187 mln (0.04% of AUM) to GEM balanced funds, but that was counterbalanced by the $187 mln outflow from Asia regional funds, and $769 mln and $243 mln losses, respectively, from LatAm and EMEA. Brazil funds were the hardest hit in terms of AUM, losing $767 mln via redemptions (4% of AUM). With the exception of South Korea, which benefited from an ETF inflow of $430 mln, all other major country funds reported net redemptions to total $1.4 bln, or 140% of the total net outflow, coming out via ETFs.

ETFs may add significant volatility. ETFs have attracted the bulk of the new money invested into EM funds over the past year, accounting for $33.6 bln, or 55%, of the total invested in all EM funds. ETF investors are much more flexible when it comes to market response, so the big danger for the asset class right now is confidence in global growth and the equity outlook being sufficiently undermined to drive a significant outflow.

Russia suffered its first full allocation loss of 2013. Russia funds again reported relatively modest net redemptions for the past week, as they have done for most of this year. The total loss last week was $66 mln (0.4% of AUM), bringing the total outflow YTD to $212 mln, more modest than the $325 mln taken out of India funds or the $956 mln lost from Brazil funds.

However, while in previous weeks the net direct loss from retail funds was more than compensated by the indirect allocation from big GEM funds, this did not happen this week. Russia’s aggregated loss for the past week, inclusive of its share of GEM and regional funds, totaled $88 mln, or 0.14% of AUM in that category. Over the previous thirteen weeks, Russia funds attracted a net $1.9 bln of new money because of GEM allocations despite the direct flows totaling a loss of $445 mln.