It is not as gloomy for EMs but most flows are going to Europe now: Cameron Brandt

Cameron Brandt, Director of Research, EPFR Global, says it is now the turn of US equity funds to see something of a reversion to the mean. The free pass they got in the immediate aftermath of Donald Trump’s election, if not revoked, is certainly being scrutinised. The past 10 days have not been terrible for emerging markets. There has been a pickup of flows into dedicated Europe and Japan equity funds. In India, valuations are starting to get to levels where people will be comfortable again and maybe even see an upside.

The last time we spoke, there was only bad news for emerging markets like India. When do you think there will be only good news for emerging markets like India?
Cameron Brandt: It is certainly not quite as gloomy for emerging markets as when we last talked. But the emerging markets that are doing best at the moment are the ones perceived as being geared to Europe. We have had a fairly bumpy period, but it is Europe that has been catching the attention and flows. That said, the reallocation away from emerging markets definitely seems to be slowing. It has not stopped, but there are certainly points of life in the general universe and it is now the turn of US equity funds to see something of a reversion to the mean.

The free pass they got in the immediate aftermath of Donald Trump’s election, if not revoked, is certainly being scrutinised. So certainly, the past 10 days have not been terrible for emerging markets. But apart from Europe, they have not been dreadfully good for any asset class other than gold. Investors have definitely recalibrated on the risk-reward side, less willing to just assume that it will all be reward and no risk, but no huge sense of panic either.

There are two scenarios that could be at play. One, money moves out of the US, which it is, but it moves to developed markets like Japan and maybe some European markets, that is scenario number one. Scenario number two is that money goes back to India and China. Within that, we can argue whether it will be India or China, but money essentially does not go back to developed markets. Which playbook do you think could be at play?
Cameron Brandt: Well, the first playbook is the one that is currently happening. We have seen a pickup of flows into dedicated Europe and Japan equity funds. Certainly, in the case of Europe, there is some value to be picked up there. But some emerging markets are seeing positive attention. So, I do expect a move slowly towards that second playbook. Of course, the big wildcard is how various trade scenarios play out. But for the moment, it is the first one you outlined and that is likely to persist for a while.

If there is some kind of ceasefire to emerge in the Ukraine-Russia conflict, that I think would light an even bigger fire for a while under European assets. But India has had its correction, certainly from a mutual fund perspective. After a year-and-a-half of relentless inflows, we have now seen about three months of more outflows than inflows, but valuations are starting to get to levels where people will be comfortable again and maybe even see an upside.

The other big part, of course, is China and especially after all the announcements coming in, everything from measures to boost consumption, talking about propping up the real estate market, talking about even raising the country’s birth rate. What is the reality about flows moving into China?
Cameron Brandt: Flows for China have been very cautious lately. After a record-setting spike at the beginning of the fourth quarter, they have been pretty low-key in both directions, small inflows or small outflows relatively. The attitude has shifted to show me the money. There have been a lot of announcements of this nature. Chinese policymakers still have a lot of residual credit from the way they have coped with the previous two crises. But in the mutual fund world, people want to see what is actually happening and some of those measures will really take time, especially the demographic one that is not going to turn around in a few months.

I would expect a pickup in flows towards China again. Recently, we have seen people looking for additional Chinese exposure, have opted to get it at one step removed and we have seen a lot of flows recently into Hong Kong equity funds.