Your Economy (No Politics)

[Bullwinkle]

Record inflows to emerging market
By Jennifer Hughesin New York
March 14 2006 02:00


Inflows into emerging market equities have set an annual record just 11 weeks into the year as investors continue to chase the higher returns seen in developing markets.

In the week to March 8, $20.9bn has been poured into emerging market stock funds breaking last year's record of $20.3bn, according to Emerging Portfolio Fund Research.

Brad Durham, a managing director of EPFR, said: "While it is natural to assume that such strong inflows into any asset class are a worrisome sign, there are institutional investors just waiting for corrections in equity and bond markets to plough more money into emerging markets."

In spite of recent wobbles and concerns that rising US bond yields could signal the end of the party, emerging market bonds have remained strong, keeping yields near recent record lows.

"Investors keep coming back to the solid fundamentals in emerging markets and the notion that there is actually more risk coming from developed markets," added Mr Durham.

Inflows tailed off slightly in the past week and fell below their average for this year, but were still positive. The strongest net inflows, in dollar terms, have been into funds covering Asia excluding Japan, but Latin American funds have taken in the most cash as a percentage of assets.

The Bovespa index in Brazil had rallied almost 18 per cent by early March, but has eased to stand 11 per cent higher at 36,792 yesterday.

Mexico's main IPC index has been up more than 8 per cent this month and by yesterday was at 18,706.19, up 4.8 per cent.

There are fears that investors pouring money into the asset class are simply "performance chasing", or taking the spectacular returns of recent years as a basis for their expectations, without due regard for the risks posed by emerging markets, not least the concern that these overseas inflows,not fundamental improvements, are driving some of the more stunning stock market rallies.

"We have seen an unusually heavy amount of investment into emerging market equities over the last three months," said Michael Woolfolk, currencies strategist at Bank of New York, a leading custodian bank.

"Even though you hear that past performance is not an indicator of future prospects, you see it year in and year out: the funds that did best the previous year get the lion's share of new money."

http://news.ft.com/cms/s/bdf289d6-b300-11da-ab3e-0000779e2340.html