"The broadest, most distinct theme of 2007 has been the record strong inflows into global and emerging-market equity funds," says Brad Durham, managing director of EPFR Global, which tracks funds with some $10 trillion in total assets worldwide. "This trend has been very pronounced in the data."
As fund flows have moved into emerging and global equity funds, they've flown out of U.S., European and Asian developed-country funds -- since August.
"In the flows we followed through December 26, 2007, $40.8 billion went to emerging markets vs. $22.4 billion last year," Durham explains. "That is quite an increase in the intensity of these fund flows. And, combined with other global flows, that's a combined $77 billion for the funds and flows we track."
For Durham and other financial experts, this represents an important shift in investor sentiment. "Investors are now comfortable with emerging markets as part of their core holdings and are looking for more geographic diversity," he shares. "They have become considerably more comfortable with emerging markets because of the relatively strong economic fundamentals."
Emerging markets, according to Durham, are generally "not saddled with complicated credit vehicles and their associated uncertainties, like the subprime woes." Plus, they enjoy fiscal surpluses, massive foreign-exchange reserves, strong GDP growth and robust corporate earnings growth.
"This is a tale of two asset classes," he adds, "and investors are distinguishing between the risks. Yes, there are still political risks in emerging markets, but the fiscal and economic risks there are considerably less than ever before."
In 2008, many investors and market watchers are looking to see if the strength on the emerging markets' growth story can hold up given the expected weakness in the U.S. and other developed economies. "This is the so-called 'decoupling theory,'" says Durham. "It's an interesting theme in the short run and maybe in the long term, too, as a trend. Is this growth sustainable for the next 10 to 15 years?"
"The big picture for 2007 is unequivocal: a broad re-rating of emerging markets assets that has prompted a big rotation out of developed markets funds as investors seek to increase their exposure to places like Russia, Brazil and Korea," Durham concludes.
Janet Levaux is the managing editor of Research; reach her at firstname.lastname@example.org.