Global emerging market funds continue to be overweight on India, despite the selling spree in March.
India represents 6 per cent of the average GEM equity portfolio. In addition, GEM equity funds are currently making key country bets on Thailand and India, while Brazil is emerging as a consensus overweight candidate, according to the latest data on allocations released by Cambridge (US)-based fund tracker EmergingPortfolio.com Fund Research.
On a sectoral basis, these funds, which are mandated to invest in emerging markets globally, are overweight on financials and energy sector stocks, while being underweight on the IT hardware and materials stocks.
Within the financial sector, they are heavily overweight on the banking industry group since emerging markets fund managers tend to use banking stocks to build overweight country positions and as country proxies.
Of the 91 GEM equity funds with $34 billion in assets tracked by EPFR, the average regional allocation to emerging Asia was 51.1 per cent in early April, down from 56 per cent in August 2002.
Meanwhile, funds have increased their weightings to Latin America to 19 per cent from 17 per cent in the previous month.
GEM equity funds have been consistent net buyers in Korea, Brazil and Chile in recent months, foreshadowing strong rallies in each of these markets, while continuing to reduce their exposure to Mexico, Russia and Malaysia.
These funds are increasing their exposure to Latin America at the expense of Asia ex-Japan. And after an extended period of net buying, China appears to be slipping from favor as fund managers respond to the economic consequences of the SARS epidemic.
GEM funds have been net buyers of Brazilian equities in six out of the last seven months, according to EPFR data.
Their 8.8 per cent weighting in Brazil exceeds their allocation to Mexico (8.2 per cent) for the first time since March 2001 and their stance towards Brazil is the second most consensus overweight call, after Thailand.
"The aggressive net buying of Brazilian equities over the past year, during some periods of pretty bleak global sentiment, is getting rewarded," notes Brad Durham, a managing director of EPFR.
"Brazil's country index has returned more than 24 per cent year to date. Chile has also been on a rampage, rising 22.4 per cent from the beginning of April after flat first quarter performance, and the GEM funds we track have been consistently buying this market since October of last year," he says.
GEM funds have also been reducing their vulnerability to a fall in oil prices by selling Russia and Mexico, two emerging markets highly dependent on oil exports.
While Russia has been a high-octane performer this year, gaining in excess of 20 per cent, GEM funds have been consistent net sellers of Russian equities in recent months.
The proportion of funds that are overweight Russia is now the lowest since last August, suggesting that the Russian equity market rally this year has been fueled mainly by domestic investors and funds not dedicated to emerging markets.
Mexico has also suffered net selling from the GEM equity funds in seven of the last eight months. While funds are still, on average, overweight the market the magnitude of the overweight has been reduced.
While the anticipated structural reform in Mexico has stalled, fund managers are also aware that Mexico tends to underperform during periods of dollar weakness.
GEM funds have an average weighting of 17.2 per cent to Korea, which is underweight the benchmark.
But with net buying of Korean equities in six of the last seven months, that underweight is being slowly closed out.
Elsewhere in Asia, GEM funds have sold Malaysian equities for six consecutive months and the underweight to Malaysia that has been a feature of their country allocations for years is deepening.
EPFR allocations data also concluded that GEM funds were net sellers of China for the second month in a row, which follows a period in which they had been net buyers of China for nine months out of ten.
GEM funds continue to run a significant underweight on Taiwan, which is related to their underweight of the IT hardware sector.
Funds also remain significantly underweight South Africa, but were big net buyers of South African equities in March.
Cash levels increased in March to 4.3 per cent of total assets under management from 3.9 per cent in February.
EPFR tracks equity and bond fund flows, cross border capital flows, country and sector allocations, and company holdings data from its universe of 3,000 international and emerging market funds with more than $700 billion in assets.
Unlike other fund data providers, EPFR data comes directly from funds or their administrators and includes both offshore and US-registered funds.
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