In the past few weeks the Indian market has been losing its nerve and falling extensively. Most market analysts see sell of exchange traded funds (ETFs) as one of the main reasons for this weakness. However, Cameron Brandt, Dir-Research, EPFR Global does not believe so.
"Index needs to fall to trigger big redemptions. It is more a case of actively managed funds rotating positions and a general uncertainty about the outlook for EMs as a whole," he said in an interview to CNBC-TV18.
Despite recent dips seen in emerging Asian markets, investors are paying more attention to these regions. "With India and China acting as two anchors for emerging Asia, I would expect to see an uptick in flows into emerging Asian funds, not a smooth and steady one, but somewhat bumpy over the next couple of months," he elaborated.
Meanwhile, he cautioned investors of a volatile April.
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Below is the verbatim transcript of Cameron Brandt’s on CNBC-TV18
Q: India has underperformed in the past week compared to many Asian markets and developed equity markets. Have you noticed any outflows, especially from Exchange-Traded Funds (ETF) that invested in India?
A: Yes. March and April have been rough months for emerging markets (EMs) in general and the emerging Asia fund groups in particular. In case of India, it is slightly more collateral damage. There are two reasons that are spooking the investors in the region, one is Korea specific the Sabre-rattling on the peninsula, the other is fears that Japan’s aggressive efforts to drive down the value of its currency are going to trigger a currency war in the region that will hurt the export stories of a lot of markets.
In just a past couple of days, we have seen flows into emerging market funds beginning to pick up again and the latest data from the US has dented its relative attraction. India may head back to the path that we have seen for most of this year, that is flows coming in for a bit and flows going out for a bit and flows coming in for dedicated India funds.
Q: Can you break up the flows from March into how much has gone into developed markets and how much has gone out of EMs?
A: During March and into the first few days of April about USD 3 billion have been pulled out of emerging market equity funds while roughly USD 26 billion has flowed into developed market equity funds. It comes with a caveat, that money on the developed side is bypassing euro funds, with the bulk of it going into dedicated US & Japan equity funds.
Q: Within EMs, which countries have come in for excessive punishment? Which countries have faced outflows?
A: A couple of them. Brazil dedicated funds have been stumbling. In the emerging Asia region like Korea, funds in the past few weeks have not been doing well. Dedicated Russia funds have also struggled to attract fresh money for a variety of reasons of which the biggest two are the Eurozone’s continuing struggles and the more doubtful outlook for commodity prices.
Q: Have you seen any evidence of ETFs pulling out money from India?
A: There really isn’t. Index needs to fall to trigger big redemptions. It is more a case of actively managed funds rotating positions and a general uncertainty about the outlook for EMs as a whole.
Q: We have seen severe weakness in gold and a bit in crude. How have fund flows been to these two commodities? Is there a secular long-term outflow of funds from gold?
A: It is a little early to say that it is a long-term outflow, since mid-February the tide has turned. We have seen consistent outflows from gold & precious metals funds and in some weeks, significant outflows. There have been strong flows albeit at a much lower level into funds dedicated to silver. Silver is one precious metal that has been doing pretty well at the moment.
Q: Is there any saturation with the US equities now that they have been touching all-time highs or are they still a preferred asset class?
A: Both points have some validity. We are hearing a fair bit from the more direct fund managers that valuations are now at the top end of the range that fits the underlying fundamentals. On the other hand, a lot of decisions that are relative to Europe, that is a lot of equity investors without working choices, events in Europe are making those investors think that more US exposure would be a better thing. In the EMs context, they think the tide is more likely to turn in their favour rather than get worse.
Q: How does the way forward look to you? Can you extrapolate from past data to glean what assets may attract funds in the next couple of months?
A: In the two previous years, this April may have been particularly bumpy. This is due to the broad global conditions, investors are being even more cautious about taking strong positions ahead of the summer slowdown in the northern hemisphere.
The focus on Mexico is likely to continue. Mexico is close to the US, which is a developed economy and is doing best. It is also regaining its competitive advantage in key export industries vis-à-vis China because of the higher shipping cost across the Pacific.
Emerging Asia continues to be the region that despite the recent dips, investors here pay more attention. With India and China acting as two anchors for it, I would expect to see an uptick in flows into emerging Asian funds, not a smooth and steady one, but somewhat bumpy over the next couple of months.