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Rotation of the world

One of the key global investment themes at present is the rotation from emerging market equities towards developed markets. The shift, initially driven by concerns of overheating in emerging markets and bullishness on growth in the developed world, gathered pace in January and February, as political turmoil in the Middle East and North Africa reminded investors of the risks associated with developing economies.

In the week ending February 2, investors pulled more than $7bn (£4.4bn) out of emerging market equity funds according to EPFR Global, marking the strongest recorded outflow in three years. In comparison, developed market portfolios took in $6.6bn during the same week. America, Japan and global funds were especially popular with investors and only Europe-focused funds suffered net redemptions.

The trend was also apparent in this month’s Merrill Lynch global fund manager survey. The survey of 188 fund managers, conducted by Bank of America Merrill Lynch Research and TNS from February 4-10, found that two-thirds of respondents were overweight global equities. However, their views on the relative appeal of emerging and developed market stocks had shifted radically since the January poll.

The proportion of managers overweight in emerging market equities collapsed from 43 per cent to5 per cent – the steepest monthly decline in developing market exposure in the poll’s history and well below an average of 28 per cent. Appetite for eurozone equities rose from a net underweight of 9 per cent to an overweight of 11 per cent, with respondents ranking America and the eurozone as the regions they would most like to overweight.

Financial commentators were last week grappling with the implications of the rotation and whether it will continue. HSBC Global Asset Management, Gavekal and Capital Economics expect the rotation to reverse. According to Gavekal, lower year-on-year inflation rates in emerging economies may prompt renewed investor interest in the region towards the end of 2011.

Adviser Fund Index panellists say the rotation has not yet had a bearing on their allocation decisions. Mick Gilligan, the head of research at Killik, says his firm has a “structural overweight” in emerging markets and recent outflows represent a buying opportunity. He views India as particularly attractive, with stocks trading on 14 times next year’s earnings and earnings growth over the next 12 months of 15-20 per cent.

Ashcourt Rowan head of research Tim Cockerill says the company reduced its emerging markets exposure by two percentage points at its quarterly asset allocation meeting in January – the first cut in over a year. Ashcourt Rowan chose to boost its weightings to Japan and Britain instead, via positions in GLG Japan core alpha equity, M&G recovery, Schroder UK alpha plus and JOHCM UK opportunities.

Data supplied by Financial Expres

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