EM funds see net inflows

Recovery is boosting fund flows

Emerging-market stock and bond funds had net inflows in the first week of the year, extending 2009’s record increase, on optimism that a global economic recovery will gather pace, EPFR Global said.

Developing-nation equity funds received $2.2 billion in the week to January 6, while those investing in high-yield and emerging-market fixed-income securities drew $560 million, the Cambridge, Massachusetts-based research firm, said. China equity funds had a second week of outflows, surrendering $197 million, EPFR said.

The International Monetary Fund said the agency will probably raise its forecast for global growth later this month as rich and poor countries contribute to the recovery from a recession. The MSCI Emerging-Markets Index of stocks rallied 75 percent in 2009, the most since the gauge was introduced in 1987. Emerging-market debt returned 26 percent, the best since 2003, according to JPMorgan Chase & Co.’s Emerging Markets Bond Index Plus.

“The appetite for emerging markets will not fade away,” said Francesca di Cesare, an emerging-market bond manager who overseas 91 million euros ($130 million) among the $10 billion of assets at Aletti Gestielle SGR SpA in Milan. “It’s just a matter of pricing.”

Last year’s records
The inflows added to the record $64.5 billion that entered emerging-market equity funds last year, EPFR said this week, citing initial figures from funds reporting daily and weekly. They estimated that funds investing in developing-nation fixed- income securities drew more than $8 billion in 2009, also setting a new high.

Still, Michael Wang, a strategist at Morgan Stanley, is among those predicting a “correction” in developing-nation equities as countries from China to India move closer to pushing up borrowing costs. The MSCI Emerging Markets Index declined 0.1 percent to 1,013.59 in Singapore.

“The trigger for corrections in emerging-market equities could be central-bank tightening, and certainly China plays into that,” Wang said. “This is not the start of really restrictive monetary policy, but we certainly can see the market pull back in anticipation of rate hikes.”

Mark Mobius, who oversees $34 billion in developing-nation assets at Templeton Asset Management, said that while the “bull market” in emerging markets will continue, it is ripe to be interrupted by declines of 15 percent to 20 percent “or more,” possibly triggered by increased initial public offerings or as governments reduce money supply.

The authors are Bloomberg News columnists. The opinions expressed are their own.