Investors have pumped a record amount of money into equity funds focused on emerging markets this year in a sharp reversal of sentiment.
Emerging equity fund inflows surged to $80.3bn in 2009, according to research group EPFR Global. That was the highest influx since EPFR started tracking the data in 1997 and compared with $49.5bn of outflows in 2008.
This year’s inflows also were $25.9bn more than the previous record in 2007 and contrasted with the $86bn of outflows suffered by developed world equity funds in 2009.
“It has been a great year for the emerging markets after the collapse of many of these markets at the end of 2008,” said Nigel Rendell, senior emerging market strategist at RBC Capital Markets.
The FTSE All-World Emerging Markets Index has risen 75 per cent since January 1, far outpacing the 28 per cent gain reaped by the FTSE All-World Developed Index.
Analysts said emerging markets were valued at about 20 times their trailing 12-month earnings, compared with about 7.9 times during March lows.
The world’s four biggest emerging market economies, Brazil, Russia, India and China (known collectively as Bric) accounted for the bulk of this year’s investor interest, with about $60bn of these inflows.
Global emerging market equity funds, which mainly invest in the big four, have seen inflows of $39bn in 2009. Funds that specifically invest in the Bric as a group have seen $4.75bn of inflows this year, China-specific funds have absorbed $6.8bn, Brazil-specific funds $4.9bn, India $3.1bn and Russia $1.5bn.
In recent months, flows have been boosted by funds that normally only invest in developed world stocks, as well as dedicated emerging market groups.
Investors have been particularly keen to gain exposure to China as it has become the driving force behind the global economy, with growth forecasts of 10 per cent for 2010, says RBC Capital Markets.
With industrialised economies expected to grow at much lower levels than their emerging market peers, investors expect greater returns from developing world stocks.
Emerging market currencies, such as the Brazilian real and the South African rand, also had a strong year. The real is up 25 per cent against the US dollar and the rand is up 22 per cent since January 1.
Analysts warn that the outlook remains uncertain for next year because any signs of a slowdown in the US economy could prompt a sharp rise in risk aversion. This could prompt a sell-off in emerging markets.