Monday, 23 February 2009

Emerging Market Fund Outflows Data Suggests Limited Risk-Taking. Now, Check on WSJ's Intelligent Investor Column: Money is Flowing Into EM Funds!

The beauty is in the eye of the beholder. So is sincerity. I keep on telling this girl she is gorgeous, but she doesn't believe me! I do mean it. She takes my compliments with a grain of salt -- which, funnily, in my humble view is a good policy!

Data from EFPR showed modest outflows of money from emerging market bonds and stocks during the week ended Feb. 18. Bond funds in the asset class have posted net outflows in 27 of the last 28 weeks. In the case of equities, investors pulled just under $500 million in total from global emerging markets, Asia ex-Japan, Latin America and Middle East and Africa equity funds, compared with the $400 million in inflows in the prior week. Dresdner Kleinwort explained the phenomenon this way: ''the lack of demand from real-money investors is acting as a drag for primary market activity and secondary market spreads.´´ Things make sense, at least until now.

Then, one reader kindly sends me this. It's a column by Jason Zweig of the Wall Street Journal's Intelligent Investor section. It follows:

Desperate investors do desperate things

A few months ago, most people were too terrified to do much more than wring their hands while sitting on them. But now, as the stock market takes another bullet every day and the yields on cash dwindle away, some investors seem to be flinging caution to the winds.

EPFR Global of Cambridge, Mass., reports that $2.4 billion poured into emerging-markets funds and another $3.4 billion into junk-bond funds in the first six weeks of this year, even as investors yanked $1.3 billion out of much safer balanced funds.

According to, so far in 2009 nearly half of the new money in exchange-traded funds has gone into ETFs that bet on gold, oil, real estate, emerging markets and junk bonds, often with leverage added to amplify the potential gain, or loss.

Daruma Asset Management Inc., a New York firm that invests in small companies, counts 1,240 U.S. stocks that have revenue, trade on an exchange, have a market value of less than $2 billion and were up for the month of January. The smallest 10th, so tiny that you could buy the biggest of them outright for only $14 million, were up an average of 48% in January. One, a money-losing Internet firm called Kowabunga! Inc., shot up 267% last month for no apparent reason. Kowabunga didn't respond to requests for comment.

Why are some investors turning rashly bullish during the worst bear market in decades? It is the financial equivalent of a "Hail Mary pass" -- the desperate attempt, far from the goal line and late in a losing game, to fling the football as hard and as high as you can, hoping it will somehow come down for a score and wipe out your deficit.

If you fixate on the money you already have lost, you may feel that a moderate future gain can only reduce those losses, making it hardly worth seeking at all. On the other hand, even the slightest chance of striking it rich holds out something precious: hope. That emotion can elbow aside the fact that most Hail Mary passes fail, in the stadium and stock market alike.

"When you want to recover your losses," said University of Oregon psychologist Paul Slovic, "payoffs loom larger than probabilities."

Well, yes. Money is coming in, Zweig says. It should be, I say. It would be plausible to think that some investors are betting on lottery stocks and bonds to recoup previous market losses. It would be plausible too to expect a recovery in emerging market bonds and stocks at some point ... but, take it easy. Let's see how the crisis evolves, most experts say. Stay put but ready.


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