Friday, February 5, 2010

EM Equity Flows: Outflows of $1.6bn In US$ Billions

EM Equity Flows: Outflows of $1.6bn In US$ Billions

Source: EPFR Global. Both US and non-US domiciled funds. All Dedicated EM: GEM, Asia ex JP, LatAm, EMEA. AUM Covered represents funds tracked by EPFR Global.

•EM equity fund had net outflows for a second consecutive week at $1.6bn for the week ended 02/03/10. ETF type funds accounted for 80% of outflows.
EMEA funds were the only regional category to see inflows last week. On a cumulative basis the last 10 weeks brought $9.4bn in net inflows.
• MSCI EM was up 2.6% over the week ending February 3rd. At the country level, Egypt (+7.8%), China (+4.7%) and Russia (+4.1%) outperformed,
while Morocco (-1.3%), Chile (-1.3%) ad Czech (-0.3%) underperformed. At the sector level, Consumer Discretionary (+4.1%), Financials (+3.6%) and
Energy (+3.5%) outperformed and Utilities (+0.7%), IT(+0.7%) and Health care (+1.7%) underperformed.
•This week we reviewed inflation risks in APxJ. Headline inflation is rising in APxJ, due to rising energy and food prices and in some countries, by
housing costs. APxJ equities tend to experience PE multiple contraction in periods of rising inflation. The forward PE multiple at 13.0x is now exactly in
line with the historical regression fit to our base case 2010 inflation forecast. However, there are downside risks if our high inflation scenario occurs.
Energy, Materials, Insurance, Professional services and Consumer staples sector tend to outperform during rising APxJ headline inflation and utilities,
Household & Personal Services, Consumer Durables, Pharma, Retailing and Software Services tends to underperform during rising inflation.
•In our base case (70% likelihood) headline APxJ inflation peaks in Q2 2010 at 4.5% and falls in 2H to average 4.1% for the year as a whole (vs. 6.4% in 2008 and 2.4% in 2009). We assign a 20% probability to a high inflation scenario of 5.5% and 10% to a low inflation scenario of 3.0%. The strength of domestic and external demand and policy action require monitoring.
•On our base case of 40% US$ EPS growth in 2010, MSCI EM is trading on 12.5x 2010e P/E. Our scenario weighted price target for year-end 2010 is 1200, implying c.30% upside from the current levels. We remain comfortable with our 4% overall overweight equities stance and would add exposure on additional weakness.


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