Investment flows to and from emerging markets are notoriously volatile. From recently compiled figures, there also seems to be a big disconnect developing between what pension funds are doing and what mutual funds are doing.
The figures from US mutual fund researcher EPFR Global showing an accelerating flight by mutual fund investors from emerging markets in January and early February (see separate report this edition), are in stark contrast to the continued strong institutional investor inflows into most emerging markets.
Institutional investors should take heart from this disconnect because it provides yet further evidence of the potential benefits which will come from taking a long-term view.
The EPFR report notes that outflows from emerging markets began in the December quarter last year and picked up in January and early February as the Egyptian political crisis unfolded. The early outflows were probably due to profit-taking and the later ones probably due to panic.
Institutional investors do take profits, true, but they tend not to panic. In a crisis, institutional investors, either by design or accident due to their governance structures, tend to do nothing. This normally ends up being the best course of action.
Michael Lipper, one of the most experienced collectors of mutual fund investment information in the world, as founder of Lipper Advisory Services, is always looking for something which can force a meaningful deviation from a current trend. He is also an ardent blogger so it’s not difficult to discover what he’s thinking from week to week.
In his latest blog last week he admitted that he had probably over-reacted to the “blood in the streets” of Cairo and that, on reflection, there was unlikely to be a lot of market contagion following the eruption of political unrest. On further reflection, he said, there was also unlikely to be a really messy succession for Egyptian leadership.
Lipper is a CFA and former president of the New York Society of Security Analysts as well as founder of the Lipper performance measurement indexes and tools. If he can react to a political eruption and then quickly re-address the situation, where does that leave less-informed investors?
Lipper claims to be relatively bullish longer-term but he has a lot of worries. He thinks, for instance, that the number of “truly cheap” investments has shrunk in recent months. What he is worried about is a “second supply cycle” of good economic news.
The second supply cycle deals with the production of securities, funds of various types and derivatives which are built to give investors and speculators ways of participating in the first cycle of good news.
He uses the current example of gold: the size of the “paper gold” market is considerably larger than not only annual gold production and consumption but may also be approaching the amount of gold held by the world’s central banks. This sounds a lot like the derivatives market which supported the US mortgage boom, until it went bust.
Lipper’s advice is to stay with present “sound” investments and continue to deploy cash reserves. He expects the next peak in 2013.