"If things really turn against emerging markets...

Cameron Brandt, research director, EPFR Global on the current mood of global institutional investors

Institutional investors in the market depend on EPFR Global to track what their peers are up to. It provides fund flows and asset allocation data to financial institutions around the world. As FIIs have been net sellers lately, Outlook Business checked with Cameron Brandt, research director at the data analytics provider to check what global institutional investors are obsessing about lately.

What is your assessment of the Chinese crisis? Has the pain been discounted for now?

I see the equity market volatility and the state of the Chinese economy as largely separate. In the case of the former, as long as the market is driven by domestic retail investors, it is likely to experience painful drops. In the case of the economy, the transition from exports and fixed investment to consumption and services, on such a large scale, is unlikely to go smoothly. But short-term pain now probably translates into less pain down the road. Hence, the recent stimulus measures by the Chinese government are a mixed blessing.

How are foreign investors weighing the Chinese crisis in terms of its implications on other emerging markets?

They are obviously connecting the dots between China and countries such as Brazil and South Africa that have greatly expanded their exports to China over the past decade. But the further tightening of US monetary policy is a far bigger concern for investors evaluating the general outlook for emerging markets.

In terms of risk reward, how is India looking? Could more FII selling follow and what could trigger that?

FIIs have bought into India’s reform story. It’s a story that has, on the face of it, stalled after the recent parliamentary session. So their exposure has currently overshot (modestly) the potential rewards. Signs that the central bank is bowing to political pressure or legislation that undermines the government’s reform credentials would be very damaging to FII flows.

Do you think India could benefit from reallocation in global equity portfolio allocation because of the risks attached to China or other commodity dependent emerging markets?

It certainly can. If Modi’s government can deliver some of the reforms it promised then I’d expect the gap between global emerging market fund allocations for India and China to narrow appreciably. If things really turn against emerging markets, India is also likely to fare better, in relative terms, because of its modest exposure to global trade.

With respect to emerging markets, what risks are investors most worried about?

They differ from region to region and market to market. Lower oil prices are good for India, for instance, but not so good for Russia, Nigeria or Mexico. Inflation is an issue for South Africa, Brazil, Venezuela and Turkey but not so much for China, India or Czech Republic, Poland and Hungary. Political risk is high in Europe; Middle East and Africa but much less so across emerging Asia. Again, the biggest overarching risk is aggressive tightening of US monetary policy – this time via higher interest rates – that squeezes emerging market borrowers with dollar denominated debts.

Where is the money going? How are fund flows looking at this point in time?

Any place with accommodative monetary policies, preferably formalised in a quantitative easing program. Year-to-date, the Europe and Japan equity funds that we track have posted combined net inflows of $150 billion while over $135 billion has flowed out of US equity funds.