Bonds Preferred As Emerging Market Flow Slows?

Bond

Make Money Blog ~Foreign investment flows into emerging market stocks and bond funds slowed in the week to March 7, according to EPFR Global, a fund tracking service in Cambridge, Mass.

Emerging market investors poured $2.27 billion (up 0.2% in assets under management) into the market in the last week, of which $1.43 billion (0.8% AUM) of inflows went into bond funds and $840 million (0.1% AUM) went to equity funds.

The rate of total inflows to emerging markets assets is likely to stabilize within the next week, Barclays Capital estimates. The Greece debt crisis remains a source of overall investor concern.  Recent global economic data have been mixed, with the softer-than-expected Chinese industrial production and retail sales accompanied by better U.S. employment data and German industrial production data this week.

Finally and importantly, emerging markets continue to offer better yield for income investors and in most cases, a comparatively better growth profile than developed markets despite this year’s slowdown.  Strong government balance sheets and higher interest rates will continue attracting foreign investor capital into fixed income assets in places like Brazil.

The structural motivation behind the flow to emerging markets has prevailed for a number of years now. Institutional investors are recognizing the growth factors in the big four BRIC countries, and looking at their asset allocation and seeing that the BRICs remain an underweight. This underweight will likely be corrected over the long term. The trend is still in its infancy.

“We recognize that sporadic interruptions (of flow) can be repeated,” said Barclays in a note to clients on Friday.  For instance, 2008 was an extreme example of outflows in the BRIC markets, and 2011 also saw equity outflows due to inflation concerns.

“We do not expect such an interruption in 2012,” said Barclays. “It’s unrealistic to expect the momentum of early 2012 flows to continue indefinitely, but similarly we should not forget that the water mark for average flows is high.”

Year-to-Date investment flows

Equity       Bonds

Brazil              $3.2 bln     $861 mln

Russia             $1.8 bln     $568 mln

India               $1.7 bln      $66 mln

China              $4.8 bln      $142 mln

Hong Kong     $1.6 bln       $93 mln

Source: EPFR Global; Barclays Capital/ forbes.com

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