>FUND FLOW TRACKER (MACQUARIE RESEARCH)

A flood of liquidity

Event
■ Liquidity flows remain strong across Asia and global emerging markets. The latest fund flow numbers, for the week ending 29 July, show inflows as large as at any time this year, with Asia ex Japan and global emerging markets seeing a weekly net inflow of US$1,565m and US$906 respectively.

■ Greater China funds (China, HK + Taiwan), continued to see sizeable weekly inflows for the third week in a row. Sentiment towards China clearly remains very positive, with investors looking to diversify their exposure.

■ India has also seen huge inflows recently. The election outcome in May is clearly being seen as a very positive outcome by foreign investors, as they continue to buy the market despite now unambiguously rich valuations. Indonesia also saw large inflows in the week ending 29 July, recording its largest net inflow since the data collection began in 2000. The strength of the domestic economy and the favourable political environment are two factors no doubt supporting foreign investors’ positive view of the market. Taiwan and the Philippines were the only countries to see net outflows over the week.

Outlook
■ In the near term, there is clearly the risk that more money continues to flow into Asian equity markets despite the now elevated valuations. As we highlighted in our previous note, foreign investors are not the only source of liquidity; domestic investors are also playing an important role:

⇒ Depositors are switching from time deposits into demand deposits. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (ie, demand deposits). Unsurprisingly, M1 growth has been outpacing M2 growth in most of the markets across Asia.

⇒ The low returns on alternative investments could divert more money into the equity market. With the gap between the earnings yield on equities and the deposit rate high (in favour of equities), there is the obvious potential for domestic investors to continue to re-allocate into equities.

■ With liquidity, and not fundamentals, driving markets, we advise investors to progressively reduce beta as equity prices move further away from fair value. In terms of sectors, we prefer domestic names such as banks, telecommunication and consumer plays. As for countries, we are overweight Singapore and Taiwan from a valuation perspective and also China and Indonesia for growth.

To see full report: FUND FLOW TRACKER