LONDON – Global investors seem happy to slip back into riskier waters of emerging market equities once again but it's a step-by-step process and ways of staying in the shallows are still being sought by many. As reflationary policies of the world's central banks have sunk real yields on traditional safe-haven bonds into negative territory, income-seeking investors have over the past year or more pushed out to higher-yielding debt and “quality” western blue chip stocks with hefty dividends. And if, as some strategists now believe, the next big step is a ‘great rotation' out of now expensive government and corporate bonds and into undervalued equity, then the big underperforming emerging markets, such as China, are back in vogue. Describing this week as a “decisive breakout” for equity funds at large, tracker EPFR said inflows to all equity mutual funds in the four days to Tuesday, at $6.8 billion, outstripped bond inflows. Cumulative inflows of more than $40 billion since the start of last month are now more than twice that to bonds. Morgan Stanley's cut of the same data shows the full week to Jan 9 showed a record week of inflows to emerging market equities of some $7.4 billion, even as emerging bond flows stayed robust. Markets have been responding. MSCI's emerging market equity index has jumped 6.5 percent since the start of December, outstripping the 5 percent gain on the global index. And Shanghai's gains of almost 15 percent in that period show how much China's economic growth rebound has been a key driver and illustrates the fact that it emerged late last year as most global investors top country pick for 2013. Yet with few believing the coast is fully clear given such a fragile global economy and financial system, persistent euro troubles and US budget wrangling, there's still demand for at least some safeguards and defensive strategies even in what are perceived to the riskier spaces. One of the growing trends of 2012 was to start seeking emerging market stocks with big dividends, trying to find a middle ground between what have traditionally been considered white-knuckle rides of pure growth plays with the desire for steady income and lower volatility. According to Lipper data there were at least 50 new funds launched worldwide last year specifically targeting emerging market income stocks – or more than four times that amount if you include global equity or Asia Pacific equity income vehicles that include at least some proportion of emerging market names. “What works for investors with this sort of product is that it's not totally beholden to the sorts volatility traditionally associated with emerging markets,” said Emily Whiting, portfolio manager at JPMorgan Asset Management whose emerging income fund launched in 2010 now has 250 million sterling in assets. “The beauty is you reduce the risks while benefitting from a compounding of the growth and income,” she said, adding that 250 emerging market stocks worldwide pay dividends of more than 4 percent average available in Britain or European blue chip indices and the 2.5 percent available on Wall Street's S&P500. Dividend yields on emerging market indices at large are now at least equivalent of global benchmarks and dividend payout ratios as a percentage of earnings exceed US equities. Julian Mayo, investment director at Charlemagne Capital who runs an emerging market income fund of more than 40 stocks, said the rolling 52-week volatility of this fund last year was 9.9 percent, less than the MSCI emerging benchmark's 14.5 percent or 19 percent in Germany and 12.2 percent in the United States. “Essentially what we're aiming for is low volatility exposure to emerging markets,” he said. The fund - with stocks from across the emerging universe from Asia, Latin America, east Europe and the Middle East and with exposure to a range of sectors topped by financials, telecom and consumer stocks - returned more than 20 percent last year. — Reuters
