The EM retreat continues

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http://ftalphaville.ft.com/blog/2011/02/18/492346/the-em-retreat-continues/


The EM retreat continues


Posted by Neil Hume on Feb 18 09:35.

And so… the rotation out of EM equities into DM equities goes on.

Data from Citigroup:

So, in the week to February 16 outflows from emerging market funds totaled $5.45bn, up from $3bn just the week before.

According to Citi, that’s the third largest weekly outflow since January 23 2008 (which was $10.7bn) and takes outflows for the year to nearly $12bn:

    - This latest outflow represents 0.8% of Assets Under Management (AUM) and marks the fourth consecutive week of outflows totaling $18.53bn;

    - By region, Asia and Latam both saw significant outflows of (0.8% of AUM). Importantly, there was actually an inflow into CEEMEA funds of $159mn (0.3% of AUM). Pan- EM outflows were $3.16bn or 0.9% of AUM;

    - Year-to-date, outflows from all EM funds now total $11.8bn (1.3% of AUM).

All of which won’t shock anyone who read this week’s BofA Merrill Lynch Fund Managers survey.

This highlighted a massive regional rotation, a surge in exposure to US equities and also triggered a sell signal:

    US allocations saw a further uptick this month as investors get out of EM equities. The US is now at net 34% O/W (from 27% O/W in Dec), the highest reading since Nov’08 which was the highest reading on record. This keeps the US allocation easily in potentially over-owned territory, based on our 1sd guideline (it is actually more than 2std deviations above long-run average).

    After reaching close to record optimism as recently as November, GEM positioning saw a huge drop this month to a net 5% from a net 43% last month (far lower than average reading of 27%). This has triggered our contrarian regional pair trading rule, which now suggests to Buy EM and Sell US.

EM has now underperformed DM by more than 10 per cent over the past couple of months — the biggest pullback since 2008 when the market fell by 30 per cent.

However, Robert Buckland, Citi’s global equity strategist, reckons the current pull-back is unlikely to turn into a 2008-style rout:

    For a number of reasons we don’t think the current pull-back in EM will extend into a 2008-style collapse.

    First, rotation within the equity market is normal, especially at this time of year. The 2011 rotation has so far tracked what we saw at the start of 2010.

    Second, previous big pull-backs in EM equities have been during periods of collapsing global growth expectations. There is little to suggest the global growth trade is in decline.

    Third, earnings trends remain solid and there are reasons to expect EM earnings will improve, relative to DM, as we progress through the year. The stumble in EM stock prices means the asset now trades on the cheapest relative valuations since 2008 and, with earnings prospects set to improve, we think the recent pull-back provides an opportunity for investors to buy.

Who would have thought it.

Buy EM — the contrarian trade du jour.

Related link:
Investors pull $7bn from emerging funds – FT

This entry was posted by Neil Hume on Friday, February 18th, 2011 at 9:35 and is filed under Capital markets. Tagged with citigroup, Developer markets, emerging markets, Equities, fund managers survey, merrill lynch, outflow.

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