[Summary] Emerging markets saw inflows continue for a seventh week, prompting yearly fund flows to shift to net inflows for the first time since Bernanke‘s exit comments of 2013

Active funds are flowing back into emerging markets, with the increase in Korea allocation indicating intentional growth in foreign investor inflows into Korean stocks

The yen has played a major role in US dollar depreciation in 2016, with yen appreciation leading to rising global preference for emerging markets and avoidance of Japanese assets



■ EM yearly fund flows back at net inflows for first time in four years

Global MMFs recorded their largest outflow in 23 weeks, indicating a swift change of cash assets into financial assets. EM stocks saw inflows of USD5.2bn, the second largest recorded during the past seven weeks of inflows. US inflows remained steady, but EU stocks recorded their 28th week of consecutive outflows, keeping DM fund flows at neutral levels as a whole. 

EM stocks saw inflows reach 0.6% of total fund NAV, while the strength of DM inflows remained at 0% levels. The higher likelihood of the US Fed keeping its base rate unchanged (78%) - versus a rate hike (22%) - bodes well for EM fund flows. 

We note that the strength of GEM equity fund inflows (4-week moving average) is now nearing two standard deviation levels, indicating statistically excessive inflows. 

In all, even if funds continue to flow into GEM stocks, we believe it is unlikely that GEM inflows (4-week average) will remain at USD3.5-4bn levels going forward.

■ Changes noted in EM inflow targets and methods

Backed by the increase in inflows into EM stocks, we are now starting to see changes in investment targets and methods. After remaining mainly focused on GEM equity funds, inflows are spreading to equity funds that focus on other EM regions. 

Emerging Asia equity funds have seen inflows rise to post-January record highs, while Latin America equity funds have seen inflows reach 17-week highs. As a result, annual EM equity fund flows have turned to net inflows for the first time in four years. 

Moreover, inflows began to flow into EM active funds from July, after remaining focused on EM passive funds, such as ETFs. 

Overall Korea allocation rose as a result, backed by USD300m from passive funds and USD200m from active funds. 

Amid the upturn in active fund inflows, we remain upbeat on the increase in Korea allocation by active funds, as it indicates intentional growth in foreign investor inflows into Korean stocks.


■ Strong yen favorable for EM fund flows

The yen has played a major role in pulling down the value of the US dollar, with more than half of the YTD depreciation of the US dollar caused by the 19% appreciation of the yen versus US dollar over the same period. 

We find that yen appreciation has contributed more toward US dollar depreciation than the euro, which accounts for 58% of the US dollar index. We believe that yen appreciation, coupled with US dollar depreciation, is extending the liquidity-driven rally in emerging markets. 

The strong yen has sparked an outflow of global funds from Japanese stocks, a trend amplified by the BOJ’s decision to introduce negative rates. Inflows into Japanese stocks are now coming solely from the BOJ‘s qualitative easing measures, i.e., ETF purchases. With global investors losing confidence in the effectiveness of BOJ’s monetary measures, inflows into Japanese stocks are unlikely to resume amid continued yen appreciation.



Source: Mirae Asset Research