Friday, January 8, 2010

Emerging Market Equity Flows Monitor

EM funds recorded inflows of US $2.2bn for the week ending 6th Jan. 2010, $0.4bn in the last week of 2009. ETF tracker funds accounted for 54% of this week’s inflows. GEM’s funds took the lion’s share of flows with $1.7bn, while other funds recorded modest inflows. For year 2009, EM funds recorded record inflows of US$ 81bn. Total assets under management tracked by EPFR reached $542 bn, now only 6% below the all-time high

MSCI EM was up 2.5% over the past week led by Peru (+7.7%), Chile (+5.8%) and Turkey (+5.6%) at the country level, while South Africa (+0.0%), Thailand (+0.6%) and Taiwan (+1.3%) underperformed. At the sector level, Materials (+5.2%), Industrials (+4.4%) and Energy (+3.2%) outperformed, while Consumer Discretionary (-1.3%), IT (+1.3%) and Telecom (+1.8%) underperformed

This week we analyzed the impact of a sharp rise in 10-year US treasury bond yields on Asia / EM equities. Our US Economics and Interest rate strategy team have a non-consensus view on the level of 10-year UST yield, forecasting 5.5% during H2 2010, with a rise in real interest rates being the key driver. In our three-stage DDM model framework, a jump in nominal 10-year UST bond yield negatively impact fair value via the discount rate impact in the NPV calculation. A priori, we would expect the effect of higher 10-yr UST bond yields on Asia / EM equities to vary depending on what is happening to expectations for real economic growth at the time. Higher real rates resulting from stronger economic growth are likely to have a much more benign impact on equities than if they occurred in a period of weak economic growth and funding difficulties. Consider that the low point in EM equities coincided with very low nominal and real UST bond yields in Q4 08, a collapse in inflation expectations, and forecasts of global depression. Historically, using post Jan 1994 data, there is only a weak inverse relationship between both nominal and real 10-yr UST yields and the MSCI EM. This suggests that other factors are more important in explaining EM equity returns

On our base case of 40% US$ EPS growth in 2010, MSCI EM is trading on 14.1x 2010e P/E. Our scenario weighted price target for year-end 2010 is 1200, implying 18% upside from the current levels. We remain comfortable with our 4% overall overweight equities stance

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