Speaking to CNBC-TV18 Cameron Brandt of EPFR Global said that there is a consensus that the US Fed tightening will be benign. "Investors are tip-toeing back into emerging markets," he said, adding that the biggest drag in the uncertainty over Chinese economy.
Speaking to CNBC-TV18 Cameron Brandt of EPFR Global said that there is a consensus that the US Fed tightening will be benign. "Investors are tip-toeing back into emerging markets," he said, adding that the biggest drag in the uncertainty over Chinese economy. "A bulk of the countervailing force on emerging market equity markets comes from that quarter."
Regarding fund flows into EMs, he said the magnitude has been smaller. About USD 200 million net flows have poured in, he said.
We may see that kick into a higher gear, he added. He sees record inflows into bond funds in EMs as the initial shock of the Brexit is over.
He also said that mutual fund investors are more concerned about other parts of the the European Union than on UK, now.
Investors are walking back into India for some time but not as fast as I thought they would given the central bank credibility, he said, adding that India tends to do relatively well in periods of volatility because it is anchored in its domestic demand story. "India isn't exposed to trade and there are tailwinds from cheaper oil prices."
Below is the verbatim transcript of Cameron Brandt's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: First I want to understand the data on the emerging market equity flows. If you have some sense of how that has moved over the last one month because the gaining currency in the market is that we will seek quite a bit of inflows into emerging markets because of easy liquidity?
A: That is what we have been seeing from the fund flow. So, obviously it has pretty been choppy and at a low level. However, a combination of extremely attractive valuations and the fact that with a slight hiccup going into June the consensus on US interest rates has got more and more benign. We have seen mutual fund investors constantly sort of dipping their toes back into emerging markets fund groups.
At the moment, the biggest drag there seems to be uncertainty about where China's economy is. I would say that sort of the bulk of the countervailing force at the moment on emerging markets equity fund is coming from that quarter.
Sonia: Since you do this analysis in great detail, can you share some numbers with us? What kind of funds have come into emerging markets in the last one-two months and has it been much more or much less compared to what you saw about six months ago?
A: Certainly the magnitude has generally been smaller of either side of 200/300 million net flows in or out but I think we may see that kick into a higher gear. The latest weekly flows that I was looking at tonight on the face of it look very much what you would expect sort of flight to safety flows into US bond funds at a year and a half high, over 2 billion into gold funds but I also saw record inflows into emerging markets bond funds and what that tells me is now initial shock of the Brexit is over, tension is shifting to what that might mean for the US tightening cycle and one of the first silver linings of the latest bout of volatility coming out of Europe is an emerging consensus that US interest rates now is one more hike at the most. So that I think will be making mutual fund investors step up their reassessment of emerging market assets and the emerging market funds.
Anuj: On this point on European funds seeing outflow of USD 4.5 billion because of Brexit issues, has all of that money moved to the relative safe havens or is some of this money now in cash which could be deployed into some of the risky assets at a later point.
A: You are right. This week, we saw very big flows into Europe money market funds. Over USD 20 billion went there. So, certainly European investors have not completely bailed out of the region. They have taken one step away while they wait to see what has happened. And I would also say that while from external perspective, this is all about Brexit, what we have been seeing through the fund flows is that certainly, for some time, mutual fund investors are more concerned about other parts about Europe frankly than they are about the UK, even with this somewhat surprising vote. And if you look at redemptions from the dedicated country funds this year, look at them in terms of percentage of assets under management, it is the core Eurozone country funds that have been hit much harder than the dedicated UK equity funds, even after the Brexit vote.
Sonia: Let us talk a little closer home because that is what matters to our viewers right now. I was just looking at a couple of these fund notes and I have seen that there are USD 225 million of inflows into India this week. Has the buying in Asia increased and particularly in the Indian markets, compared to what it was a couple of months ago?
A: What we have seen through the fund flow perspective is that investors are tiptoeing back to India for some time, definitely not as fast as I thought they would, given the central bank credibility and the fact India still has a reform story, even if it is a slightly more reduced one than it was 18 months ago and certainly monsoon projections are fairly benign at the moment. But, we have definitely heard plenty of talk about India being a market that it is time to move back into. Some technical analysis recently, by our sister company in Informa Global Markets on the Sensex that was pointing fairly strongly towards a rebound. So, India tends to do relatively well in periods of volatility because you are still very much anchored in domestic demand story so you are not quite as exposed to trade, you are obviously getting some tailwinds from the cheaper oil prices. So, put it this way, I believe the technical note from our sister company about India, certainly short-term prospects for seeing more portfolio capital.
Anuj: Have you done any studies on if any parallels can be drawn between the current market situation which is so much outflows from equity markets going into safe havens to post 2008 era? Any parallels in terms of the data points?
A: Not so much parallels. But we are certainly seeing by now, a fairly established pattern which is the crises, some kind of crisis will push money out of equity funds back into bond funds. But the lesson for certainly mutual fund investors given the tremendous efforts by the major central banks to keep markets liquid and keep money flowing to equities and riskier asset classes is that to stay too long in the bond funds is to miss out on a rebound. So, the parallels I am expecting to be duplicated, unless there is some other real sucker punch lurking in the wings, is a fairly strong rebound of flows into equities in the not too distant future.
Sonia: And where do you see that major chunk of the rebound flow into? Will it be once again into equity funds in the developed markets like the US and Europe or do you see a lot of it flow into Asia.
A: Where it usually sort of follows, not always, but a general pattern where it starts moving into the US and fairly moves into big diversified funds with global mandates, be they developed or emerging markets. And then as the rebound gathers strength, it moves on into the big regional fund groups and then down to the country level. So, usually, the first sign is that the global equity funds and the global emerging market’s equity funds that we track, starts to see steady and increasing inflows and when it has legs, the flows will move out into more and more focused fund groups.
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .