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FUND FLOWS: Fresh Money Heads To Emerging Markets Equity To Start October

It was the seventh straight week despite a looming U.S. interest rate hike and ECB tapering.

The week ending Oct. 4 saw EPFR-tracked Emerging Markets Equity Funds absorb fresh money for the seventh straight week and 27th time in the past 28 weeks, despite hardening expectations of another U.S. interest rate hike and a start to the “tapering” of the European Central Bank's quantitative easing (QE) program by the end of the year.

All four of the major regional groups recorded inflows, with the diversified Global Emerging Markets (GEM) Equity Funds leading the way in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms.

Once again, EMEA Equity Funds were helped by the recent shift in sentiment towards Russia. Higher oil prices, restructuring by domestic corporations, declining inflation and a string of interest rate cuts have rekindled investor and fund manager appetite for this market. Flows into Russia Equity Funds hit levels last seen in the first quarter, when investors were still hoping for a thaw in relations between the U.S. and Russia that would set the stage for an easing of economic sanctions. Meanwhile, both GEM and dedicated BRIC (Brazil, Russia, India and China) Equity Funds increased their allocations for Russia late in the third quarter.

Funds dedicated to another BRIC market, Brazil, saw their longest run of inflows since the first quarter come to an end during a week when the country's benchmark equities index climbed to a new record high. Investors certainly had profits to take: EPFR-tracked Brazil Equity Funds had posted a collective gain of nearly 30 percent since mid-July as the country's reform and recovery story gained momentum. But Chile Equity Funds, which recorded their biggest outflow since late in the third quarter of 2015 the previous week, saw more money flow out. A slowing economy and impending presidential election in mid-November sapped investor appetite for this market.

A number of the bigger Asia ex-Japan Country Funds posted inflows that were partially offset by redemptions from funds with regional or Taiwan mandates. These included India, China and Korea Equity Funds, with the latter extending a run that began in mid-July. The latest sector allocations data shows Asia ex-Japan Equity Fund managers cutting their allocations for cash and telecom plays to 28 and 74-month lows, respectively, while exposure to the information technology sector, which climbed from an average of 16 percent in the fall od 2013 to over 29 percent early in the third quarter of this year, leveled off.

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

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