Emerging markets back on FII radar

Lokeshwarri S. K. BL Research Bureau | Updated on April 19, 2011 Published on April 19, 2011

Global investors are again ploughing money into emerging markets, including India, as a string of incidents mars their appetite for developed nations.

According to EPFR Global, the global fund-flow tracker, emerging markets equity funds posted inflows for the third straight week on April 15, a run that has seen a record $10.3 billion of inflows in the first fortnight of April. On the other hand, flows into developed market funds have slowed sharply with Japan Equity Funds recording outflows for the third consecutive week.

This contrasts starkly with the performance in the first quarter of 2011 when developed market funds absorbed $57 billion and emerging markets recorded outflows of $24 billion.

Data published by SEBI supports this trend in global fund flows.

According to the market regulator, foreign institutional investors have turned net purchasers since March. They were on the back foot in the first two months of the year, having pulled out over $2 billion up to February. But flows picked up from March and around $3 billion have been pumped into Indian stocks since then.

The change

It may be recalled that there was an all-pervasive concern regarding high inflation, policy rate hikes and slowing rate of growth in emerging economies in the beginning of 2011. This, coupled with improving economic growth rate and accommodative monetary policy adopted by developed economies, made funds flow into equities of developed markets in the first two months of this year.

But the situation began altering in March.

“Natural disasters in Australia, New Zealand and Japan have not only interrupted the recovery, they have in New Zealand and Japan knocked back growth in 2011 significantly,” notes Deutsche Bank's Global Market Research report.

Resurfacing credit crisis in eurozone and recent rate hike by the European Central Bank have led to investors pulling money out of this region.

Weakening dollar and political squabble have not helped US equities.

As outlook for developed markets deteriorated, emerging market started looking relatively more attractive.

If fund flow into emerging Asia is considered, India has received the largest portfolio flows among its Asian peers in 2011, with the exception of Japan where inflows were bloated due to carry trade borrowings.

According to Bloomberg, Asian countries such as Indonesia and South Korea have recorded net outflows this calendar. Net inflows into other Asian countries such as the Philippines, Taiwan, Vietnam and Pakistan are lower than that recorded in India.

Some of these external flows could have been routed through hedge funds.

Performance of India-focused hedge funds was extremely robust in March.'s India index was up a strong 6.67 per cent in March while hedge funds globally returned an average of 0.06 per cent.

Published on April 19, 2011
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