If you were to take the data on fund flows for the first nine months of 2009, the numbers seem to indicate that money has been flowing out of developed markets into emerging markets. The chart shows, for example, that during the year to 30 September, all emerging market funds pulled in $40 billion (around Rs1.9 trillion), while funds investing in developed markets saw outflows of $52.7 billion.
But the last quarter has seen a reversal of this trend. According to data from EPFR Global, inflows into Asia ex-Japan equity funds were $2.8 billion during the September quarter, one-fourth of the inflows in the June quarter. US equity funds had similar inflows, getting $2.9 billion in Q3. But unlike emerging market funds, US equity funds had seen outflows of $2.8 billion in Q2. Funds investing in Europe saw their year-to-date outflows shrink from $4.5 billion at the beginning of the September quarter to $730 million at its end. Bric (Brazil, Russia, India, China) funds saw average inflows of $80 million a week during the September quarter, down from $135 million a week in the June quarter. Clearly, improvement in business conditions in the developed countries has led to an increase in fund allocation to their markets.
That’s reflected in market performance during the third quarter. As on 2 October, the MSCI World index was up 3.06% and MSCI USA up 3.85%, compared with a rise of 4.71% for MSCI Emerging Markets (local currency values have been taken, to negate the impact of the weak dollar). The earlier outperformance of emerging markets has been much diminished. Admittedly, one reason is the fall in the Chinese markets, which has led to some rotation away to markets such as India. EPFR says that in late September, inflows into India equity funds hit a nine-week high. MSCI India has done far better than the average in the last quarter by rising almost 10%.
Graphics: Ahmed Raza Khan / Mint
Where’s all this money coming from? EPFR points out that outflows from US money market funds accelerated during the September quarter, with redemptions during those three months equalling nearly 90% of the total inflows for 2008. At $3.4 trillion, assets in these money market funds are now almost at the levels they were at before their panic-driven rise after the collapse of Lehman Brothers Holdings Inc. If the outflows from these funds dwindle, fuel for the liquidity-driven rally in equities will start running low.