More investors come into emerging markets

Emerging markets equity funds absorbed over $5 billion for the second consecutive week, but the fund flow pattern also indicated that investors were beginning to get cautious, according to Emerging markets Portfolio Funds Research.

Money Market, Balanced, Global Equity and US Bond funds all took in fresh money, and there was a clear shift within US equity funds in favour of Large Cap Value funds. Consumer Goods sector funds had their best week in over three years.

“Despite the hints of higher risk aversion during, this year’s story is clearly the accelerating shift by investors out of funds geared to the major developed markets — the US, Japan and the Eurozone — and into those focusing on emerging markets,” said EPFR Global Analyst Cameron Brandt said in his weekly note. “When you look at the numbers through the first three quarters of this year and 2006 the retreat from Japan and Europe Equity Funds is particularly striking,” the note added.

Asia (excluding Japan) and the diversified Global Emerging Markets (GEM) equity funds accounted for the bulk of the flows into emerging markets funds during the first week of October, taking in $2.87 billion and $1.84 billion respectively.

China was the favourite with country-specific investors, while flows into BRICs (Brazil, Russia, India and China) equity funds hit a 39 week-high in terms of percentage of assets under management.Korea, which has the biggest average country weighting among GEM Equity Funds, too continued to find favor with investors, with Korea country funds posting their 21st week of net inflows.

Flows into Latin America Equity Funds slowed but remained positive, with Mexico country funds taking over from their Brazil counterparts as a driver of inflows.

BRICs equity funds continued their recent rally, taking in a net $434.6 million for the week. Year-to-date, however, they remain well off the pace they set in 2006. And, with the exception of Brazil, the same was true for the funds geared to the individual BRIC countries.

EMEA (Europe Middle East Africa) equity funds had their best week since late July thanks in part to an influx of fresh money into South Africa country funds.

Despite posting their best weekly performance since the third quarter of 2006, Japan equity funds recorded their 27th consecutive week of net outflows. Investors are still concerned that the Bank of Japan (BOJ) will push ahead with its stated intention of normalizing interest rates, thereby undercutting an extremely fragile recovery in domestic demand and fueling an appreciation of the yen that will cut into export earnings. Japan’s central bank will meet on October 11.

The euro’s relentless appreciation against the dollar, and the implications that has for Eurozone exporters, is also weighing on investor sentiment towards Europe. They pulled another $1.22 billion out of Europe equity funds, pushing total outflows since the beginning of June over the $17 billion mark.

The global credit squeeze also appears to have pushed European economic growth onto the downward part of the growth cycle, with consumer and business confidence indicators dropping sharply in recent weeks.