Global funds make a return

Reversal of fortunes due to moderation in expectations of a rapid rise in US interest rates.

The outflow of global funds from India and the rest of Asia has stopped. Instead, global funds are once again looking at emerging markets, as the way in which relative interest rate movements in the US and in emerging markets become clear. What is more, India seems to be the preferred destination in Asia.

Inflows into India-focused funds totalled around $77 million in the one week to September 15, 2004, taking the total inflows in the first 15 days of September to $140 million.

Elsewhere in Asia, outside Japan, equity funds received healthy inflows for the fourth straight week. In the week ended September 15, these funds received an additional $154.8 million, half of which came into the Indian markets.

Market sources said the reversal of fortunes was due to the moderation in expectations of a rapid rise in the US interest rates. Therefore, global funds were now again looking for assets in emerging markets for decent returns.

Such funds, dedicated to investing in emerging markets, received as much as $349.20 million inflows of fresh money in the week ended September 15, 2004, data compiled by Emerging Portfolio Fund Research.com (EPFR), an international fund tracking service, show.

During the last four weeks, Asian ex-Japan equity funds received $528.7 million, bringing the total inflow of fresh funds since January 2004 to $3.3 billion, nearly 13 per cent of assets at the beginning of the year.

Domestic portfolio managers said that improving economic fundamentals was one of the main reasons for the renewed interest in emerging markets. This was confirmed by a slew of rating upgrades, making it easier for investors to swallow the risk attached to this asset class.

In India, for instance, the budget for the current fiscal year was better than expected, market sources said. Venezuela and Brazil had their credit ratings upgraded, while Brazil has reported strong gross domestic product growth.

Further, according to EPFR, there has been a change in the perception that US interest rates are going to rise rapidly in the near future. This was one reason a lot of money deserted the emerging markets and went back to US markets.

With this popular perception no longer dominant, investors began returning to emerging markets, including India. "Investors have shifted their attention back to the higher yields available in the emerging markets," the Boston-based fund research outfit said.

Globally, investors pumped in a net $1.52 billion into developed and emerging markets equity funds in the week ending September 15.

"Rising share prices globally, lower oil prices and solid economic data that were not too strong as to spark worries of rapid monetary tightening, have helped encourage investors back into equity funds after six straight weeks of outflows," said the research firm.

Diversified global emerging markets (GEM) funds reported inflows for the first time since the week ending July 7 this year. These funds took in $109 million from investors, reducing outflows to $5.38 billion since January 2004.