In a sign that investors were expecting a macroeconomic backlash in the east, China and Asia ex-Japan equity funds suffered exceptionally large net outflows. Investors withdrew a record €4.5bn from Asia ex-Japan equities in July, according to data provided by Morningstar. Europe’s investors were just in time with their retreat from Asia, as the MSCI Asia ex-Japan index is down more than 10% since August 1st.
Their crystal ball needs some polishing though, since the panic in China spread to Europe this week, as you all know. So the rush into developed market equities was not quite the safe escape they might have thought it would be. Instead the flight from EM to Europe and US equities, with both asset classes welcoming their largest net inflows since February 2014, only will have helped to dilute losses a little bit.
History repeating itself
This ‘Great Rotation’ shows a remarkable similarity with both mid-2013 and early 2014, when European investors also pulled out from Asian and global emerging market stocks and invested the proceeds in developed equity funds.
This strong negative correlation between EM and developed (especially European) equity fund flows also shows in EIE’s investment sentiment data (see graph above). Each time European fund selectors and asset allocators are saying they will increase their exposure to European equities (as they are doing now), appetite for EM equities edges downward. It seems to be a pattern: the two asset classes hardly ever are popular at the same time.