Money is flowing — into emerging markets anyway.
This chart, from Merrill Lynch’s EM equity strategists, shows global inflows to emerging market funds together with the MSCI World. The funds have seen their biggest weekly inflow since May, according to ML. That’s a $4bn inflow after $39bn in redemptions in the past six months. Not bad for a relatively risky asset in the midst of a global recession.
But, it’s not purely an emerging markets story. Funds in the developed world have also seen inflows in recent weeks (all except Japan).
But, analysts (Merrill Lynch included) are viewing these as a very short-term rally.
In fact, according to State Street, it may already be over.
Institutional investors have staggered into the new year punch-drunk. After a brief dalliance with risky assets they have reverted to the cautious stance that characterized most of the second half of 2008. The current investment regime is once again Riot Point, the most risk averse.
The dip into risk was well-timed. Equity markets are generally up around 20% from their November lows and emerging markets have fared even better (the MSCI Emerging Markets Index is up 30%). Some stocks and sectors have performed spectacularly. The UK Metals and Mining index, for example, is up a whopping 51% from its nadir on November 20th.
Faced with looking forward to a continuing rally or back over their shoulders at darkening economic clouds, institutional investors have decided to take profits and are once more selling risky assets. What gave the latest rally legs has been the support of institutional investors. Now they are once more on the sidelines there must be a danger that the gains will be reversed.
Indeed, credit markets are already much more bearish than equities, with the iTraxx Europe Crossover at something like 975bps:
In short, bonds and equities are telling very divergent stories about what is likely to unfold in the coming months. Though this sort of cross-asset class dissonance is possible in markets, it is more likely that this relationship will correct.
Related link:
Emerging (bear) market rally - FT Alphaville
