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FUND FLOWS: China Equity Funds Pulling in Fresh Money

MSCI’s index changes, as well as Chinese regulators clamping down on capital flight and unregulated financial products, have investors looking anew at the country’s domestic equity funds.

During the final week of April, both retail and institutional investors saw the pressure building on emerging markets in response to tighter U.S. monetary policy, with signs that growth in Europe has lost momentum and the more aggressive U.S. position on trade as a buying opportunity. That allowed EPFR-tracked Emerging Markets Equity Funds to post collective inflows for the 11th straight week despite a pause in the commodities rally and Turkey’s ratings downgrade.

China Equity Funds accounted for the biggest share of the week’s headline number. This fund group continues to benefit from a number of tailwinds, ranging from MSCI’s decision last year to include Chinese A shares in its benchmark EM index to the 6.8 percent (official) GDP growth the country posted during the first three months of the year. China’s efforts to clamp down on capital flight and unregulated financial products have also forced Chinese investors to take another look at domestic equities. China’s current growth is positive for Taiwan, which sends around 40 percent of its exports to the mainland, and Taiwan Equity Funds recorded their biggest weekly inflow since late 2Q17. Taiwan Equity Funds were also boosted by the resilience of Apple iPhone sales, a product whose supply chain involves Taiwanese companies such as Taiwan Semiconductor.

Latin America Equity Funds, meanwhile, posted back-to-back weekly outflows for the first time since mid-November. Electoral considerations are taking center stage in both of the region’s major markets, Mexico and Brazil, with voters in the former going to the polls July 1 to choose a new president. The frontrunner, Andres Manuel Lopez Obrador, has promised to roll back or revise many of the structural reforms pursued by Mexico’s current government.

Among EMEA Country Fund groups dedicated to Saudi Arabia extended their strong start to the year as the country’s reform story is complemented by higher oil prices. But investors remain leery of countries pursuing statist economic policies. Both Russia and Emerging Europe Regional Equity Funds experienced further outflows. Allocations to energy stocks among EMEA Equity Funds are currently at an 11-month high, with managers rotating exposure from consumer plays and adding to their cash holdings, which are at levels last seen in 2Q16.

Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.

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