GEMs lure funds; energy biz catches bulls' eye: EPFR Global

Cameron Brandt, senior analyst, EPFR Global explains on CNBC-TV18 that incremental funds from bonds have begun to flow into GEM equities followed by Asian equity funds led by China. Brandt adds that energy funds, which lost investor-interest with crude ruling strong despite predictions of weakness, have begun to witness a return of interest from the bulls.

Below is an edited transcript of the analysis on CNBC-TV18 Q: How have flows into equity funds been year-to-date in 2013? Have they been as good as in the second-half of 2012 atleast?
A: The pace for equity-fund has accelerated dramatically, especially for equity funds focusing on emerging markets which have had their best start to any year since we started tracking them in 1996. Flows into bond funds have been steady but a little bit off the pace seen in 2012 which was a record-setting year for the ones we tracked with nearly USD 0.5 trillion going into them. Q: Is there any specific emerging market or group of emerging markets into which you think the funds are going?
A: The fund group doing the best is the most diversified one- the Global Emerging Markets (GEM) fund group, but they have been pretty closely tracked by emerging Asian equity funds with China being, at the moment, the star of that particular universe. Q: Do you track flows into specific countries? How exactly does India figure within this group?
A: We do. The specific-investor interest in India has been mildly positive but pretty sloppy with two weeks of inflows and a week of outflows. Investors at the moment seem contend to get their exposure to India as part of their diversified package, so even though dedicated India funds are not really standing out at the moment.
A lot of portfolio capital is being allocated to India via these big diversified funds which both the emerging Asia, regional and GEM funds that we track send on an average 7-10 percent of their portfolio inflows to India. Q: In 2012, India was a big outperformer. In 2013, especially the last couple of weeks, India seems to be pretty much stable or maybe even an underperformer. Would you attribute this a bit of an overvaluation or maybe just a wait-and-watch scenario till some discernible trigger comes about?
A: I think the scenario is definitely of the wait-and-watch kind. Investors are certainly recovering their risk appetite in the US, but that means less than it perhaps feared at previous points. They are still much more cautious, especially on the retail side and much less interested in markets they think might whipsaw from great heights to great lows which India’s equity market has acquired some kind of reputation for doing.
The other factor that is probably dragging on India is uncertainty about the currency. The rupee had a fairly bumpy year in 2012 and when investors here compare it to the tightly managed Chinese currency, that tends to be another factor in making them break towards Chinese equities. Q: Some fund managers are speaking of an impending switch from bond funds to equity. Do you think that is taking place?
A: There is definitely a shift to equities at the moment, but at this stage it is more a greater allocation of any given week’s inflows are going to equities over bonds, it is not as if bond funds are suddenly completely out in the cold. What we are beginning to see is that some of the more conservative bond-fund groups are seeing flows shrinking. That is especially true of the US and European government debt.
As the yields really tighten we have started to see fairly consistent outflows from those fund groups. So there is a rotation but it is not yet a full-blown ‘pull money out of bond funds and push it in the equities’. Q: So it is more incremental money is going into equities rather than any switching out of bond funds?
A: Yes, that’s right. That is exactly what we are seeing. Q: What is the level of funds flowing into gold-funds? What were the trends in 2012 and what do you think the trends will possibly be in 2013?
A: During the summer there was something of a flight to gold, but once the various major central banks announced big policy initiatives in September, flows into gold funds slowed down and turned really negative by December. We have been seeing steady, if not spectacular outflows, from gold-funds pretty much since the first week of December. Q: Do you expect that trend to continue in 2013?
A: Yes. I do not think they have had any weekly inflows so far this year. Q: Is money started to go into energy funds in 2013?
A: Investors have not been particularly bullish for sometime despite the fact that the price of crude has held up surprisingly well given all the predictions. But we have just noticed a shift back to energy-sector funds. So I think the bulls are finally knocking at the door there.