HOW quickly things can change. When it comes to fund flows, fickle at best, the shifts can be even marked.
As recently as the end of last year, all the talk in market circles was of a banner year for emerging markets in 2011. After all, the developed world had messed things up. The US remained mired in its troubles, and the eurozone was staring at a fiscal crisis. Emerging markets, in particular Asia, became the new hope, the beacon for all the smart money.
That was then. But just over a month into the new year, the smart money seems to be having a rethink.
Fund managers are starting to pull some of their money out of emerging markets and putting it back into developed markets, recent fund flow data shows.
Data from Lipper last week showed a record US$4.1 billion outflow from emerging market equity funds in the week to Feb 2. According to Fund-tracker EPFR Global, investors pulled more than US$7 billion out of mutual funds and exchange-traded funds (ETFs) focused on emerging market stocks last week - more than double the US$3 billion outflow the previous week.
This was the third largest weekly outflow on record, and of the emerging market funds, Asia-ex-Japan ones were hardest hit. Funds flow weakness was widespread among Asia's individual country funds too. Outflows from China funds doubled from the previous week to US$455 million, overshadowing Hong Kong's net inflows. In contrast, global international funds recorded subscriptions in all of the first five weeks of 2011, with cumulative inflows of US$9 billion thus far.
What has led to this shift? Clearly, risk perceptions have changed. On the one hand, the political crisis in Egypt has put emerging market risk back in focus. These markets are also facing raging inflation, with the consequence of rising interest rates - an unconducive environment for stocks. China's latest interest rate hike simply drives home the point.
On the other hand, the developed markets don't look so much of a lost cause now. Several factors are working in favour of putting money back in US stocks, including sequential economic improvements, strong corporate profitability with better-than-expected earnings reports, and undemanding valuations. And Europe has not self-destructed (yet). Equity investors are betting political leaders will bridge their differences over the mandate of the European Financial Stability Facility and stop the region's debt crisis from spreading. Goldman Sachs, for one, is telling investors to buy European bank stocks for the first time in more than 16 months.
Views are divided on whether this shift in money from emerging equities back to developed markets is secular in nature, or just a temporary reallocation. Some are arguing that the pullback from emerging markets present a buying opportunity, but that is just a view. Much will depend on how events play out in Egypt - and that, really, is anyone's guess. Even if a peaceful outcome is reached, the winds of change from Egypt could still destabilise the Middle East. If that happens, all bets are off.
The more interesting question is how the Singapore market fits into all of this. So far, within the region, Japan has benefited most from the flight to developed markets, with investors making a distinction between the Japanese market and emerging Asia.
So yesterday, while most Asian markets struggled, the Nikkei index hit a fresh nine-month high. After a terrific 2010, Singapore stocks have started the new year quietly, and the Straits Times Index is flat, year-to-date. In some ways, it highlights the ambiguity of Singapore's position. While index builders, and some investors, have long considered Singapore a developed market in Asia, others often still lump it together with its emerging Southeast Asian peers. Previous experience suggests that the Singapore market tends to benefit when there is a flight to safety within the region, but suffers when there is a broad flight from emerging markets globally, as is the case now. So a prolonged outflow from emerging markets will probably have an adverse impact on Singapore stocks.
The shifts in fund flows in recent weeks do not change the fundamental picture: Asia and the emerging markets are still where the promise of high returns lies, as the developed countries slowly get back on their feet and return to growth. But while the future may belong to the new world, the old - for the moment at least - is providing the calm investors need. It's going to be an interesting year for equities all right.
