EPFR-tracked Emerging Markets Equity Funds ended the first three months of 2018 having taken in fresh money in 12 of the 13 weeks and posted a new quarterly inflow record. They ended the second quarter by extending their longest run of outflows since early 2016 as tighter U.S. monetary policy, trade issues and higher energy prices complicated the outlook for this asset class.
In recent weeks investors have been pulling back from funds offering diversified exposure, with the diversified Global Emerging Markets Equity Funds chalking up their eighth consecutive outflow, while retaining a willingness to back individual markets that seem excessively cheap or offer a reform story. Turkey Equity Funds, for instance, are attracting money despite the lira’s weakness and the recent election of President Recep Tayyip Erdogan, whose policies are widely blamed for the currency’s woes. Russia Equity Funds also snapped a nine-week outflow streak.
The latest allocations data shows Turkey’s average weighting among EMEA and GEM Equity Funds is at its lowest level since late 1Q06 and 1Q01, respectively. GEM Fund managers also slashed their Brazil allocations to a 27-month low coming into June. But they lifted China’s weighting to a fresh record-high even though that country’s equity market is, by some measures, now in bear territory year-to-date.
Investors are also putting China’s stable economic growth, clear economic policy goals, massive foreign exchange reserves and the prospect of a surge in passive money tracking key MSCI indexes over the current underperformance. China Equity Funds have now posted inflows for 14 straight weeks and 22 of the 26 year-to-date. Elsewhere in Asia, Malaysia’s recent change of government has not been well received. Fears that Mahathir Mohamed’s administration will pursue a more statist approach to economic policymaking, and a more combative foreign policy has prompted investors to pull money out of Malaysia Equity Funds for the ninth straight week, the longest such run since 4Q11.
Mexico’s impending election didn’t stop Mexico Equity Funds from chalking up another week of inflows. Andres Manuel Lopez Obrador, viewed by his critics as a left-wing populist, won the July 1 presidential vote.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.