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FUND FLOWS: Emerging Markets Equities See Expected Outflows In Reaction to North Korea

Net outflows in emerging market equities was expected, but funds in China were the surprise losers.

EPFR-tracked Emerging Markets Equity Funds experienced net outflows for only the fourth time in the 33 weeks year-to-date going into the second half of August as retail investors reversed course. Asia ex-Japan Equity Funds accounted for the bulk of the headline number during a week when all four of the major groups posted outflows. EMEA Equity Funds posted outflows for the 21st straight week and the diversified Global Emerging Markets (GEM) Equity Funds for the first time since the beginning of the year.

In light in the heightened tensions between the U.S. and North Korea, the fact Asia ex-Japan Equity Funds experienced the heaviest redemptions is not surprising. But, at the country level, it was China Equity Funds that chalked up the biggest outflows while Korea Equity Funds took in fresh money for the fourth straight week. Evidence the official measures to curb China's real estate market are beginning to bite, fears that Chinese insurers may have significant amounts of shadow banking products on their balance sheet and U.S. President Donald Trump's request for probe into allegations of intellectual property theft have all weighed on investor sentiment towards China.

Managers of China Equity Funds are also concerned about the intersection of real estate lending, the shadow banking system and tighter regulation and what that means for China's financial sector. Their average allocation to financial stocks is currently at its lowest level since the fourth quarter of 2011, with much of that exposure rotated to a sector - information technology - that is likely to be in the cross-hairs of any U.S. probe into intellectual property.

China is not the only market affected by Trump's promised to level the international trade playing field. Ahead of talks about the renegotiation of the North America Free Trade Agreement (NAFTA), Mexico Equity Funds recorded their biggest weekly outflow since mid-April.

Political trends and low oil prices continue to sap investor appetite for many Emerging European, Middle Eastern and African (EMEA) markets, something reflected in the lengthy outflow streak compiled by EMEA Equity Funds. Once again Russia Equity Funds accounted for the largest share of the week's headline number as uncertainty about the impact of U.S. sanctions, sub-$50 a barrel oil prices and long-standing corporate governance issues prompt investors who rushed into this market following Trump's election in the fourth quarter of 2016 to pull back.

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

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