Key indicators and sentiments for emerging equity markets indicate the return of global fund flows to these markets and provide some optimism for investors and market participants.
EPFR Global’s latest report says that several global funds have been pulling out of money market funds and have started deploying them in equities; emerging market equities are the major beneficiaries in this, says the report. Also, a Merrill Lynch global fund manager survey emphatically says “BRIC is back”.
The EPFR report notes that money market funds, a bellwether for investor risk aversion, recorded net outflows of $381 million for through March 11, 2009, pointing towards a modest recovery in risk appetite, at least on the equity side. “Emerging market equity funds have been more resilient–in flow and performance terms–since the beginning of the year, in part because investors still think their fiscal profiles look a lot better than those of most developed markets,” noted EPFR managing director Brad Durham.
Incidentally, the Indian equity market witnessed a net inflow of Rs 887 crore from foreign institutional investors (FIIs) since March 9, 2009, even though they were net sellers of equity worth Rs 9,141 crore since the beginning of this calendar year.
Meanwhile, the Merrill Lynch global fund manager survey that says “BRIC is back”, points towards China as a major growth driver. The study found that global emerging market (GEM) investors are overweight on every BRIC market for the first time since the GEM survey began.
A study conducted by FE shows that China has indeed been one of the strongest performers in 2009, with a 24.44% gain. Russia has also been a strong performer, registering a return of 14.82%; Brazil saw returns at 6.90%. Though India has been a negative performer by 6.69%, it still outperforms developed markets (Nikkei 225, FTSE, Dow Jones IA and Strait Times) that have registered negative returns in the 10-16% range.
The Merrill Lynch global fund manager also points towards bullish growth on a global perspective, but finds a high level of risk aversion among fund managers. This is evident from Merrill Lynch’s Risk and Liquidity index (correlated with emerging markets), which declined to a four month low while cash balances rose to 5.2% during March.
However, the same report says that fund managers have increased their asset allocations for global emerging markets. The survey found that 4% of the allocators were over weight on global emerging markets, for the first time in last seven months.
The survey says that global emerging markets is the preferred region to play a rise in the global growth expectation and is seen as less risky than Europe and Japan. Among global emerging markets, the survey found preference for Asia over other emerging markets at the highest since the survey began.
Though the Indian market is expected to benefit from the increased optimism and allocation of the global fund managers towards BRIC, the forthcoming general elections and composition of the next government will be a major factor for recovery in domestic equity bourses.
“We agree that India’s long-term story is intact, but we do not see a reason to buy Indian equities at least until the election. Recent developments in politics seem to be increasing the probability of very fragmented Parliament, which could spoil chances for a post election recovery in markets,” says a recent report from Morgan Stanley.
Similar sentiments were aired by Nimesh Shah, MD and CEO, ICICI Prudential. Shah reckons that September-end would be the time when fund flows would strengthen, unless anything drastic happens.
“That will be the time when the policy direction will become clear, after the formtaion of the new government. Also, first quarter results will provide the earnings visibility of India Inc,?said Shah.