Having closed the books on a quarter that saw the most closely followed emerging markets equities index down over 7 percent for the year, EPFR-tracked Emerging Markets Equity Funds started July with the biggest retail redemptions in 127 weeks as they extended their longest outflow streak since a 17-week run ended in mid-1Q16. Once again, the diversified Global Emerging Markets Equity Funds experienced the heaviest redemptions as investors kept a nervous eye on trade tensions between the U.S. and China, and factored higher oil prices into their outlook for key markets.
The relentless pressure on emerging markets is creating some attractive entry points. Russia Equity Funds posted consecutive weekly inflows for the first time since mid-April and Turkey Equity Funds took in fresh money for the 12th straight week. Earlier in the year investors were treating these and other emerging European markets as “value traps” that appeared cheap until structural and political trends are factored in. Flows to these country and regional groups rolled over well ahead of Emerging Markets Equity Funds as a whole.
China Equity Funds continue to soak up fresh money despite headwinds ranging from trade to tighter domestic credit standards and an equity market that is currently down over 22 percent from its year-to-date high in late January. The latest allocations data from China Equity Funds shows that managers are alert to the risks posed by tighter regulation of the so-called shadow banking sector, with the average weighting for financial stocks at its lowest level since late 3Q11. Cash allocations, meanwhile, are at a 45-month high.
Among the Latin America Country Fund groups, Andres Manuel Lopez Obrador’s convincing presidential election victory did not stop Mexico Equity Funds from recording their 19th inflow in the past 25 weeks. Obrador ran on an anti-corruption platform and appears to have enough legislative muscle to pursue policies aimed at tackling youth unemployment, reducing the levels of drug-related violence and improving the social safety net. The region’s next major election is Brazil’s presidential contest in October, and the economic issues that winner will face are giving investors pause for thought in the wake of a trucking strike that highlighted the lack of appetite at all levels of society for structural reforms. Brazil Equity Funds started July by recording their biggest weekly outflow since mid-3Q15.