Bloomberg Emerging Markets Most Costly Since ‘07 on Fund Flood

June 2 (Bloomberg) -- The four-week flood of money into developing-nation stock funds that drove the MSCI Emerging Markets Index to an eight-month high is sending the strongest sell signal since equities peaked in October 2007.

Inflows totaled $12 billion, or 3.5 percent of developing- nation fund assets, the most since the 22-country benchmark hit its record high 19 months ago, said EPFR Global, which tracks $10 trillion in investments worldwide. The only other time since 2001 that funds attracted as much cash, in February 2006, the MSCI gauge lost 8.4 percent in four months.

BlackRock Inc., the biggest publicly traded asset manager in the U.S., and Aberdeen Asset Management Plc, Scotland’s largest independent money manager, also are forecasting a downturn after the MSCI index’s price-to-earnings ratio almost doubled this year. The gauge trades for 15.2 times reported profits, the most expensive level since December 2007, according to weekly data compiled by Bloomberg.

2009 Rebound
More than $12 trillion pledged by the U.S. government to ease the global recession, along with $1 trillion of aid from international organizations to bolster developing economies, prompted investors to reverse their trades this year. The MSCI emerging-market index’s rally the past three months was the biggest since its inception in December 1987 and beat the 29 percent rise in the MSCI World Index of developed-nation shares.

Money-Market Funds
Yesterday’s rally in emerging-market stocks was sparked by a report showing Chinese manufacturing grew for a third month in May, fueling speculation the world’s third-largest economy is recovering.

Bullish money managers say that emerging-market stocks will keep gaining as investors shift some of the $3.8 trillion in money-market funds into equities. The funds, which aim to preserve capital without targeting high returns, hold about 60 percent more assets than the average this decade, according to the Washington-based Investment Company Institute.

“There’s a lot of money looking for decent returns and that’s going to continue driving emerging markets,” said Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversaw $352 billion as of the end of last year. “They are the only place on earth where any growth is taking place.”
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