Asian funds: Bear market rally?

Despite strong inflows in Asian funds, market watchers believe a correction is round the corner.

Although net inflows into Asian funds have totalled a billion dollars over the past month or so, more money could come their way. Already, new money flowing into Asian equity funds was estimated to be up five times at $372 million in the week to Wednesday, April 1, 2009. However, it’s possible, says a Citigroup report, adding that Global Equity Market (GEM) funds could continue to earmark more money for the Asian markets, since they continue to get fairly sizeable amounts themselves.

Surprisingly, although Chinese funds have got more than their fair share, Chinese equities have underperformed in the region. That’s in contrast with what’s happening with Korea. The Korean market has been an outperformer, even though money has been pulled out and Asian funds remain underweight in the country. As for Indian country funds, money has been pulled out — around $41 million in the four weeks to April 1, 2009 — according to EPFR Global. In fact, since the start of the year, about $127 million has been taken out of Indian funds.

This means that foreign inflows into India have been more of the portfolio variety. While most markets in the Asian region have rebounded smartly — the MSCI Asia (ex-Japan) has risen nearly 29 per cent since the current rally began on March 9, 2009 — Citigroup believes that this is a typical case of a bear market rally. One of the indices that has done better than the MSCI Asia (ex-Japan) is MSCI (India), which has gained 35.6 per cent. Of course, a good part of the uptrend was something of a “catching up” move.

However, with the chances of a hung Parliament looming large, and the economic data not getting any better, it’s hard to understand the rebound, except to say that valuations were undoubtedly attractive. Merrill Lynch believes, though, that election worries and chances of earnings slowing could result in a 15 per cent correction. That could see the Sensex back at levels close to 9,000 and at those levels, the market will again be temptingly valued, with the Sensex trading at just over 10 times estimated 2009-10 earnings.