See hot money flows into India; long-only funds still wary: EPFR

According to Brandt, the initial reaction after the European Central Bank (ECB) rate cut was quite positive because it showed that the Central Bank is opening up its coffers to the banking system and assuring that any problems in the system will not be allowed to get out of hand, says Brandt.Below is the verbatim transcript of Cameron Brandt’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: In the last, say two three weeks, or probably last month, has there been a concerted flow back into emerging markets (EMs), we have seen commodities and countries which manufacture commodities; commodity related emerging markets doing well. How are the fund flows positioned, EMs versus developed market (DMs)?A: Concerted flows I would say no but we have definitely seen an inflection point with money starting to move back into the emerging market equity funds as is also in the case when the tide turns. The first fund group to really see money is the big diversified global emerging markets fund and then if the rebound has legs, those inflows will spread from the broad regional groups into dedicated country funds.Sonia: Do you know what the nature of this money could be? Is it money that is flowing into the dedicated India, the offshore funds which are slightly more stable in nature or do you think a lot of the money is the hot money as we call it which moves in and out quite easily?A: I think at this point it is the hot money. What we are seeing in the dedicated long only India funds is that definitely the tide is beginning to turn but those funds are still seeing outflows more weeks than they are seeing inflows. The long only money does tend to be much more cautious and while they were certainly broadly encouraged by the recent Budget, they are still waiting to see a fair big investment in Prime Minister Modi’s reform story which they built up in the previous two years is actually going to bear fruit. So, they are still moving very slowly. Latha: What is the sense you are getting about funds flows into commodities? Is this it, oversold positions being covered or is there now a concerted flow into commodities as well? Should we see say that the bottom for crude and for metals has been seen? A: Investors, certainly mutual fund investors are certainly testing that premise. Interestingly they have been very aggressive about testing the premise on the energy side. We have seen a lot of money move into energy sector funds even when energy plays were getting hammered and it wasn’t really short money, a lot of it was long money basically getting in at the bottom of a trend. However, a lot of investors and fund managers believe almost inevitably will reverse itself. It seems that we are beginning to see a bit of that on the commodity side now too. Investors are looking at commodity plays and thinking they are pretty cheap and the restructuring stories are beginning to bite and this might be a good entry point. So, certainly from the fund flow side, there is some testing of the waters. Recent flows into commodity sector funds have been heavily biased towards gold funds. So, in some senses there has been more of a fear trade than an optimism trade. However, just in the past couple of weeks we started to see the share of overall flows that went into gold funds sort of ebbing and more money going into the diversified funds and the industrial metals funds. Sonia: You did mentioned that for emerging markets as whole the dedicated long only funds are still seeing outflows which is quite disconcerting. However, what about for India particularly, what is the trend that you have seen so far and what is the expectation?A: The trend as I said is flows have been pretty negative for a while for India. In my opinion India has become something of an oversold market, certainly for mutual funds investors. However, the trend is up and flows are beginning to break water again.My expectation for India is that it really should do quite well this year. It has really good tailwinds from cheaper energy prices, it is not as beholden to global trade as many of the other emerging Asian markets and both its economic, fiscal and its monetary policy seem quite credible. So, I would expect to see positions re-build cautiously over the next couple of months.Latha: Let me get your view on something that is just a few hours old that is ECB rate cut announcement and the targeted longer-term refinancing operations (TLTROs). What is the sense you are getting? There are some experts who believe that markets are disappointed that central bankers are probably run out of ammunition or certainly impact. So, would you see an outflow from equities, from risk assets? Are you smelling it at all going by what you have seen after Abenomics and other negative rate countries?A: What we have been seeing is that the risk money has basically flowed around Europe and carried on to its destination. So, Europe equity and bond funds have seen pretty persistent outflows since the beginning of the year. Over three billion was pulled out of Europe equity funds this week which led into the ECB meeting. I think the jury is very much out on negative interest rates. The initial reaction that we got, that was positive -- was the ECB's opening opposite's coffers to support the banking system which is giving some people at least initially hope that any problems that are still lurking in the European banking system won't be allowed to get out of hand.  (Interview transcribed by Priyanka Deshpande & Vrushali Sawant)