Emerging Equity Funds Post Record Inflows on Growth Outlook

Emerging-market equity funds recorded their biggest-ever weekly inflows as the U.S. budget deal and China’s economic rebound fueled investor demand for riskier assets.

The funds attracted a net $7.4 billion in the week ended Jan. 9 and assets under management reached an all-time high of $781 billion, Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley in Hong Kong, wrote in an e-mailed note today. Developing-nation debt funds lured their second-largest inflows of $2 billion, Garner said, citing data compiled by research firm EPFR Global.

Mutual fund purchases have helped spur a 22 percent rebound in the benchmark MSCI Emerging Markets Index from last year’s low on June 4. While big inflows tend to foreshadow short-term market declines, Garner said the combination of global monetary stimulus, accelerating economic growth and an improving outlook for earnings will support share prices. His year-end target for the MSCI index is 14 percent higher than yesterday’s close.

“We would not expect a significant setback,” Garner and his Hong Kong-based colleague Pankaj Mataney wrote in the report.

The MSCI gauge, which tracks 21 countries, increased 0.4 percent to 1,076.99 yesterday after Chinese trade figures showed bigger-than-estimated gains in exports and imports. The index has risen 2 percent since Jan. 1, when U.S. lawmakers reached a deal to avert automatic tax increases for most workers in the world’s largest economy.

Regional Inflows

Emerging-market stock funds have posted 18 consecutive weeks of inflows, compared with the record 29-week stretch ended in December 2010, Garner wrote. Funds that invest in developing nations worldwide lured $5.7 billion last week, while Asia funds attracted $1.5 billion. Latin America had about $90 million of inflows and those investing in Europe, the Middle East and Africa lured about $150 million.

Some strategists use fund inflows as a contrary indicator because they suggest investors with a positive view of the market have already purchased shares. The MSCI index’s average drop after periods when four-week inflows exceeded 1.5 percent of assets under management was 4 percent in the following four to five weeks, Bank of America Corp.’s Merrill Lynch said in a Dec. 13 report.

The MSCI emerging-market index trades for about 11 times analysts’ 12-month earnings estimates, in line with the five-year average, according to data compiled by Bloomberg.

Before it's here, it's on the Bloomberg Terminal.