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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Investor Funds Flowing Back into Emerging Markets

Stock-Markets / Emerging Markets Nov 10, 2008 - 04:17 PM GMT

By: Frank_Holmes

Stock-Markets

Best Financial Markets Analysis ArticleJack Dzierwa writes:Although not proof positive of better times ahead, we were encouraged this week to see a break of a negative trend in the money flows into emerging markets funds.

For the week ending November 5, there were net inflows of $413 million into emerging markets stock funds. This is a significant improvement from the previous week, when there were net redemptions of $1.6 billion. Two weeks ago, the net outflows from emerging markets funds totaled $750 million.


Year to date, the outflows are estimated at $45 billion, nearly 40 percent of the cumulative inflows from 2003 through 2007.

Dedicated EM Equity Flows, US$bn

Much of this can be explained by the sector's underperformance—all of the countries represented in the MSCI Emerging Markets Index are down in 2008, many of them more than 50 percent. This compares to the 37 percent decline in the S&P 500 this year.

It is worth noting that, even with the bleak results in 2008, the MSCI EM Index has still outperformed the S&P 500 by more than 200 percent since 1998.

EM Post Sep-98 Secular Bull Market v. S&P 500

What might explain why investors could be interested in emerging markets now?

First, as we've said earlier, it's important to not lose sight of fundamentals, which in the long run will be the driving force in the markets. In terms of valuations, the trailing price-to-earnings ratio hit an all-time low of 6.5x in mid-October, with an equity risk premium of 1,100 basis points.

It is likely that investors are noticing these compelling valuations, as in the last two weeks higher stock prices in the emerging markets universe have driven trailing P/E up to 8.2x. While these P/Es have risen, emerging markets are still trading at a 27 percent discount to the developed markets universe.

Trailing P/E: MSCI EM vs. MSCI World

The table below illustrates the valuations within the BRIC group and emerging markets as a whole.

Compelling Valuations for BRIC Countries

Another development worth noting is that many emerging markets economies are not as leveraged as the developed countries, which reduces bankruptcy risk and presents opportunities for the financial services sectors in selected markets.

Credit as % of GDP (2006)

International investors are understandably watching developments in the United States , the world's largest economy and a very important market for emerging markets exporters. It is very likely that a prolonged recession in the U.S. would significantly dampen demand for emerging markets products.

However, as the graphs below illustrate, in the last few years we have seen a gradual increase in emerging markets nations trading with each other. At the same time, the U.S. portion of the emerging markets exports declined by a third since 2000.

Not surprisingly there are big differences between emerging markets countries in terms of their dependence on the U.S. — Mexico 's exports, for example, account for 25 percent of its GDP, while for Poland and Turkey the impact is only 1 percent.

EM Countries--Share of Total Exports (%)

Total Exports to US as Share of GDP (%)

A new research report from Morgan Stanley points out that the strong intervention by developed market governments to support their financial sectors is a key positive for emerging markets, as is reduced inflationary pressure, which will allow the emerging nations to follow a looser monetary policy.

The same report, however, also highlights some potential negatives: price weakness in commodities, upon which many emerging economies are dependent, and a continuation of the dollar's recent rally, which could further hurt exports.

By Jack Dzierwa

Jack Dzierwa is global strategist at U.S. Global Investors and co-manager of the Global MegaTrends Fund (MEGAX).

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

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