After losing USD 3 billion in August due to risk aversion, emerging market ETFs and Ex-Japan funds are now witnessing good inflows, says Dhruva Raj Chatterji, Senior Investment Consultant, India, Morningstar Investment Management.
“In June and July, flows were almost like flattish to negative. But, the tide seems to be turning in the first half of September. Year-to-date provisional data shows that we are starting to see inflows into emerging market funds and most of the inflow is actually from ETF,” he told CNBC-TV18 in an interview.
The world’s largest emerging market ETFs like iShares, Morgan Stanley Capital International (MSCI) emerging market ETFs have seen inflows of about USD 2.2 billion in the first half of September, he added.
He further pointed out that India focused offshore funds, which have been seeing outflows for a very long-time seems to have stopped now.
Below is the edited transcript of Dhruva Raj Chatterji’s interview with CNBC-TV18
Q: We have seen a lot of inflows into emerging markets like India in the last couple of weeks and a lot of that has been exchange traded fund (ETF) related. What is your view on what is the colour of the money that has come into markets like India?
A: Compared to August, where we saw some risk aversion coming into risky asset classes like emerging market funds and Asia ex-Japan funds, the tide seems to be turning month to date in the first half of September. We are seeing good inflows into emerging market ETFs. The world’s largest emerging market ETFs like iShares, Morgan Stanley Capital International (MSCI) emerging market ETFs, in the first half of September have seen about USD 2.2 billion.
It is about USD 40 billion ETF, it is the largest emerging market ETF, has 6 percent allocation to India, up to August it had seen net outflows of USD 8 billion. Suddenly in the first half of September, we have seen USD 2.2 billion come in. So, ETF flows are very volatile, it comes in, goes out.
The other positive thing is that we are starting to see inflow even into emerging market funds, but this data is provisional. After August, which was risk aversion, we saw USD 3 billion move out, we are starting to see inflows into emerging market funds and Asia ex-Japan funds. The good part is India focused offshore funds, which have been seeing outflows for a very long-time are almost flat. So, the outflow seems to have stopped.
Q: Are these just equity funds or are you seeing some flows back into debt funds as well?
A: Basically I am talking about equity funds because that is where allocation to India is more prominent. So, India focused offshore funds, which have seen about USD 3.4 billion outflows up to end of August, the September data anecdotal points towards slowing down of outflows and is almost flattish.
Q: Is it safe to assume that these emerging market funds and ex-Asia, ex-Japan funds are largely or more likely to be long only investors and therefore here to stay, as well what is the proportion, how much do you think the flows into India were ETFs and how much were these kinds of funds. Can you give some kind of a ratio?
A: ETF money is quite volatile, it is very difficult to predict; it keeps on coming in and going out, trying to capitalise on tactical opportunities. The mutual fund money, emerging market funds money is more long-term money. Emerging market funds is a much larger universe.
In Morningstar, we track 15,000 emerging market funds; they have about USD 600 billion in assets. Emerging market ETFs are about 100 and they have about USD 80 billion in assets. So, the fund is a much larger universe but the flows are much more volatile in ETFs.
After a tremendous start off in the beginning of the year, emerging market funds saw about USD 28 billion coming in the first quarter. The second quarter we started to see outflows from emerging market funds. Most of the slowdown happened in the month of June. I am guessing it is because of the Fed comment and risk aversion coming in and emerging markets in general have underperformed, so that has also further played in.
In June and July, flows were almost like flattish to negative. In August there was some risk aversion, so we saw a bit amount go out of emerging market funds, about USD 3 billion went out of emerging market funds.
That is long money going out and that was profit booking because emerging markets have underperformed. Year-to-date provisional data shows that we are starting to see inflows into emerging market funds and most of the inflow is actually from ETF. But once the full data is updated, it will also show a good inflow into emerging market funds.