In this article, we look at net fund flows for the main ex-BRIC emerging market country ETFs. There are a few standouts on net inflows and net outflows; we briefly examine these in terms of whether the crowd is telling us something we should be paying attention to. We also identify the top contrarian long and short opportunities that come out of the analysis.
What's hot and what's not?
The below chart shows for the most part, on a 6-month basis, investors have been avoiding emerging market equities; with a number of these countries having been on the receiving end of the oil price crash and the U.S. dollar surge. On a quick methodological note, only the largest ETF for each country is used (see table below); also, net flows are standardized by net asset value for comparability purposes.
(Data Source: ETF Fund Flows)
The ones that have become clear favorites of investors have, for the most part, become favorites in recent months (with the 1- and 3-month flows accounting for much of the 6-month flow total). The standouts on the upside are the Philippines (NYSEARCA:EPHE), Turkey (NYSEARCA:TUR), Nigeria (NYSEARCA:NGE), Colombia (NYSEARCA:GXG), and Egypt (NYSEARCA:EGPT).
The chart below shows price performance; it is a mixed bag - and the prices don't necessarily line up with the flows (it's not always just a case of performance-chasing).
Before we start talking about the trade ideas that this analysis prompts, it's worth reviewing the data in the table below. In thinking about the flows and price patterns, there are 4 categories:
- Strong performer, high flows (the typical market darling, everyone knows about it and is on board; this is a momentum play or potentially a contrarian short)
- Strong performer, low flows (the early warning, if the crowd is right on this one, the strong performance may soon rollover)
- Poor performer, high flows (the turnaround story, the prototypical knife-catcher trade, where investors see a big fall and start piling in, expecting a rebound back to previous price levels)
- Poor performer, low flows (the momentum sell, the price is down and people are selling for good reason; but at some point, it becomes a contrarian buy)
Top crowd following long and short opportunities:
Utilizing the wisdom of the crowds, we identify some potential long and short opportunities by reading the flows.
- Momentum longs (price up + inflows): EPHE, iShares MSCI Indonesia ETF (NYSEARCA:EIDO)
- Turnaround story longs (price down + inflows): NGE, GXG, TUR
- Momentum shorts (price down + outflows): iShares MSCI Mexico Capped ETF (NYSEARCA:EWW), iShares MSCI Malaysia ETF (NYSEARCA:EWM), Market Vectors Vietnam ETF (NYSEARCA:VNM), EGPT, iShares MSCI Poland Capped ETF (NYSEARCA:EPOL), iShares MSCI All Peru Capped ETF (NYSEARCA:EPU), iShares MSCI UAE Capped ETF (NASDAQ:UAE)
- Early warning shorts (price up + outflows): iShares MSCI Israel Caped ETF (NYSEARCA:EIS), iShares MSCI Thailand Capped ETF (NYSEARCA:THD), iShares MSCI South Africa Capped ETF (NYSEARCA:EZA)
We believe the best opportunities come from a turn in the market. Although you can make a lot of money following momentum and the crowd, the opportunities to hone in on are the turnaround story longs and the early warning shorts. It is outside of scope of this article to look at these opportunities in enough depth to gain high conviction here, but we will be doing follow up notes on these opportunities specifically (an example is the GXG note that is an example of the turnaround story trade).
Top contrarian long and short opportunities:
Sometimes it's best to run with the crowd, but often it can be profitable to go in the opposite direction. With that in mind, below are the top long and short contrarian opportunities. These are the standouts in the "strong performer, high flows" and "poor performer, low flows" categories in order of intensity.
- Contrarian longs: EGPT, UAE, VNM, EWM, EWW, EPOL, EPU
- Contrarian shorts: EPHE, EIDO
Looking at the contrarian signals, the contrarian longs are mostly countries that have been negatively impacted by the oil price. The other point to note is that, in line with emerging markets in aggregate, it's mostly contrarian buys at this time.
By looking at the net flows into these ex-BRIC emerging market ETFs, a couple of key insights are able to be gleaned, and a number of trade ideas have been generated that merit further investigation. The inflows and outflows give clues to what might end up being the big market-turn opportunities. At the same time, it allows us to take a view on the contrarian opportunities, such as those identified above.
Along with a deeper look at some of the opportunities identified above (prioritized on the "market-turn" opportunities, i.e. those where the crowd is giving us clues of a turn), expect to see similar analysis for developed market ETFs. We will also check in down the track to see how the calls in this note have gone and provide an update on the flows.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.