>EM Equity Flows (MORGAN STANLEY)

EM Equity Flows: Inflows of $2.5bn

• Dedicated EM equity funds had aggregate inflows of $2.5bn for the week ended 05/20/09, compared to inflows of $3.6bn in the prior period. The pace of flows into dedicated EM funds suggests a swift move towards optimism after a period of very negative sentiment during 2H08 – 1Q09. We have now had 10 consecutive weeks of net inflows out of the last 10 weeks. We are therefore above the 8-of-10 weeks net inflow mark that has been associated with pullbacks
in the past. The two most recent episodes when flow momentum reached these levels were June-08 and October-07, providing good sell signals

• The EM benchmark is 66% above its 27th October low ad on a relative basis only 3% away from establishing a new high vs MSCI World. The resumed outperformance of EM to DM is supportive of such flows and validates our belief in the resilience of the secular bull market in EM equities. Although there remains upside to our MSCI EM year-end price target of 810, we continue to think that the risk-reward near term no longer warrants a fully invested position.
In our 22nd March report we advised clients to take some profits and reduced our equities overweight recommendation from maximum 10% position to 6%, raising some cash

• Technically we are 2.0 SDs overbought (vs. 3 month average) versus -3.0 SDs oversold last October. Prices have risen very rapidly and valuations are also not as attractive vs. just a few months ago. MSCI EM trailing P/B is currently 1.9x, up from 1.1x at the October market trough. MSCI EM is currently valued at 12.6x 2010E P/E

• This week we updated our country quants model recommendations. We are running lower risk positions in our country quant model as valuations converged significantly in the last month. Overweights are China, Taiwan, India, Malaysia and Israel. Underweights are Mexico, Indonesia, Thailand, Argentina and Philippines

• There is only 8% upside to our 810 MSCI EM price target through December 2009

To see full report: EM EQUITY FLOWS