Why EPFR’s Brandt thinks China is a safe bet while investors will likely be cautious on India this quarter

Market Outlook

EPFR, part of Informa Financial Intelligence, tracks data from thousands of  mutual funds and exchange-traded funds to make sense of global fund flows.

Cameron Brandt, Director of Research at EPFR shares trends emerging from recent global fund flows and his take on the current market volatility in an interview with CNBCTV18.

Edited excerpts:

Yesterday’s bounceback in US markets was driven more by systematic funds, CTAs, etc. There were not a lot of money managers who were driving the market action.

Yes, it was the funds outside of the core fund universe which were driving the things yesterday. Obviously these funds tend to be more active during the volatile period and right now we have volatility in abundance. It remains to be seen how stable the flows have been in actively managed funds and ETFs (exchange traded funds). There was a modest outflow from US equities and bond markets last week but it’s better to adopt a wait and watch approach to the quality of fund flows.

At the end of last year, it was envisaged that the US and China will be the two markets which could see a lot of fund flows but since then things have changed quite a bit? What is your take?

So far this month the possibility of a bear rush or the bears entering the markets has increased quite a bit. So far the prospect of rate hike in the US has a far bigger impact on the flows rather than any geo-political issues like the developments in Ukraine, but these are good enough reasons to go slower rather than faster especially when the Fed does embark upon the tightening cycle.

What is the data indicating on India-dedicated funds? Are there a lot of ETFs that are selling?

Surprisingly not – on a weekly basis we have actually been seeing an uptick in positive flows to India. I am guessing the other sources of foreign flows are contributing to FII (foreign institutional investor) outflows, impacting Indian markets. But in the mutual fund world, there has been positive interest in India in the past few weeks.

The bulk of money India gets is a slice of the global emerging market pie – the dedicated India-fund category of the total pie is pretty small. Are you seeing more inflows into markets like China, which in the recent past witnessed a big selloff, especially in tech? Last year, especially during the second half, there were a lot of outflows from China. Are you seeing this getting reversed at the expense of other emerging markets?

There was a lot of debate earlier as to whether China deserves an asset class purely on its own within the emerging markets universe and that is now almost settled. If you look at flows away from dedicated China funds out of the overall picture, it will be very flat. What we have seen since the beginning of the fourth quarter is very strong and consistent institutional flows into dedicated China equity funds.

China is the go-to market within the emerging markets universe and the reason is quite straightforward at the moment, it is a very stable play and the broad thinking is that with a very important communist party conference coming in the fourth quarter of this year, the policy in China is going to be heavily focused upon providing stable growth and we have seen that in latest actions of Chinese central bank. So China represents a safety play at the moment due to which it is getting a lot of institutional cash.

Is it fair to assume that the big flows especially to markets like India are unlikely in the first half of the year due to what is happening with interest rates globally?

It is likely to be true to a certain extent as India is highly geared towards international energy and oil prices as it needs to import most of its oil and with the current geo-political developments pushing the oil prices up, the interest rate picture is likely to be less accommodative towards most emerging markets and investors are likely to be cautious with respect to India as well during this quarter.