GEMs funds flows:Investors continue to favour EM over DM

The recent FOMC decisions came in line with HSBC’s long held view of a gradual andpredictable tightening approach, low-for-longer long-end UST yields and a stable-to-soft USD.

    The initial market reaction has been less supportive for EM, as the “dots” stayed the same for2017 and 2018 versus expectations of somewhat lower Fed funds rate projections, but thelonger terms projection, or “dot”, did actually come down. Domestically, the EM growth outlookhas strengthened, led by China, and macro balances have improved (smaller external excesses,lower inflation and higher real interest rates). Moreover, several large EM countries areundergoing structural improvements, like China, India, Indonesia, Argentina, Brazil and Mexico.

    Overall, we still believe that some profit-taking episodes and spikes in volatility should be takenas an opportunity to add EM risk as valuations and positioning do not appear overly stretched.

    Net inflows to EM funds continue to grow faster than to DM funds for the fifth week in a row, in %of AUM, during the week ended 20 September. Among EM bond funds, most of the inflows wentto Thailand, Mexico, India and Brazil in USD and to India, Thailand and Frontier markets in % ofAUM. Within EM equity funds, China, Brazil and South Korea captured the largest deposits, inUSD, whereas Chile, Brazil and Frontier markets grabbed the most inflows in AUM. Larger inflowsto non-ETF and institutional funds continue to support EM bond funds, particularly EXD, whilesolid gains in ETF and institutional funds boosted equity funds (p.13). In DM, US funds lifted bondfunds with HY posting solid inflows. Meanwhile, inflows to European and Global equity fundssupported DM despite withdrawals from Japanese and US equity funds.

    HSBC’s early signalling system continues to suggest stable demand for EM risk (p. 14).

    Similarly, EM fund flows momentum (p. 5) and dispersion indicators (p. 8) points to similardynamics. Meanwhile, Daily financial account portfolio flows show inflows to bonds (sevencountries), mainly Indonesia, India and S. Africa, but outflows from equities (eight countries),large outflows from S. Africa and India shadowed gains in Brazil and Thailand (p. 15).