The BRICs’ Enduring Edifice Cracks
EPFR’s Q1 fund flow data showed the BRIC theme with a $775 million net outflow, continuing a 2-year aversion, as the frontier and newest CIVETS-MIST acronym packs registered an average $1 billion inflow. Brazil, Russia and India were down almost $3 billion, while China was near $2 billion positive. The dedicated equity sum overall was $30 billion beating last year’s same period pace with the diversified global subset representing two-thirds of the total. EMEA and Latin America were both losing regions, while Asia brought in $9.5 billion with smaller destinations like the Philippines and Thailand breaking records. Mexico saw a $1 billion turnaround from 2012, and Korea and Turkey attracted modest numbers, while Africa’s net allocation was negative on the drag from recent BRIC addition South Africa. Europe pullout came to $650 million, in contrast to Western Europe’s $3.2 billion draw as the developed was over triple the emerging world’s tally. Japan had an infusion of $10 billion after years of lethargy and the US take at $55 billion was up almost twentyfold from a year ago. Bonds too were ahead in quarterly comparison with almost $20 billion in inflows, but the relative local-external preference flipped with 70 percent absorbed by the former even as both benchmark indices were off slightly through end-March. Asia was again the favorite and also tapped broader global bond funds committing over $25 billion while mostly shunning Europe. Emerging market diversion was noticeable from the mainly US high-yield category which fell to one-quarter of 2012’s corresponding total. Inflation-protected appetite swung in the opposite direction with across-the-board declines in the commodity complex by far the worst fund sector performer according to the Boston-area based industry tracker, which put the great asset class rotation at a tentative turn.
The Japanese numbers are under rare scrutiny with the new government and central bank head’s unchartered anti-deflation monetary expansion and direct asset purchase push which coincided with traditional end-fiscal year big institution portfolio repositioning and retail decisions about foreign market investment trust participation. Cross-border share focus may deepen in high-return East and South Asia as well as at home, while currency overlay funds may regroup to $50 billion, with the 80 percent Brazilian real weighting increasingly eroded by interest in Turkish lira, Mexican peso and other units. Dedicated bond vehicles at half the size may also diversify, particularly if Brazil’s central bank starts to hike rates while keeping capital controls in place. Despite the IMF’s last-resort endorsement of such measures most recently in Cyprus, Japanese houses remain sensitive to a repeat of the post-Asia crisis experience which trapped holdings for long stretches. They have resumed cautious exposure in Indonesia, Malaysia and elsewhere and now eye possible restriction proliferation in Europe where bans on “naked” credit default swaps and bank stock short-selling are already flagrant.
