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By Tim Seymour

Momentum for emerging markets (NYSEARCA:EEM) is continuing -- and QE never hurts fund flows.

Markets that look most overdone include Turkey, whose rally into investment grade is very long in the tooth.

South Africa faces near-term headwinds on currency weakness, which is feeding CPI pressures; this has been a major overweight market and seeing rotation. Russia is poised for a strong fourth quarter, while India and China remain the major opportunities at the margin.

The China move in the last month was solid, but it is far from done.

UBS investment research notes that net buying continues for all regional funds except EMEA (Europe, the Middle East, and Africa).

Emerging market funds saw inflows of $1.455 billion last week versus moderate inflows of $795 million in the prior week.

  • ETF funds saw strong inflows of $1.29 billion versus non-ETF fund inflows of $165 million.
  • Investor positioning decreased in South Africa, Turkey, Indonesia, Taiwan, Russia, and India.
  • The most crowded markets are: South Africa, Colombia, Philippines, Thailand, and Turkey.
  • The least crowded markets are: CE3 (central and eastern European countries Poland, Hungary, and the Czech Republic), Morocco, India, and China.
  • Total emerging markets funds have benefited from $25.4 billion of inflows this year compared with a $34.2 billion withdrawal suffered in 2011. On a cumulative basis, $163 billion has flowed into emerging markets funds since January 2006.

Asia excluding Japan and Latin America saw inflows for six consecutive weeks. On a four-week moving average basis, there have been inflows of $310 million to dedicated emerging markets; inflows of $495 million to Asia excluding Japan; inflows of $220 million to Latin America; and inflows of $30 million to EMEA.

Non-ETF funds remain on the sidelines.

On a 4-WMA basis, ETF funds have seen inflows of $810 million versus inflows of $245 million for non-ETF funds. Year-to-date, ETFs represent 69% of the total fund pool, up from an average of 44% since 2005.

Source: Emerging Markets Fund Inflows Gain Momentum