Analysis: China slowdown weighs on emerging market funds

Sun Jul 8, 2012 5:12pm EDT
 
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By Melvin Backman

(Reuters) - As China slips, the second-half performance for many emerging market mutual funds might soon follow.

In recent months, investors have been pulling hundreds of millions of dollars out of stock funds that invest mainly in companies associated with the big four emerging market nations of Brazil, Russia, India and China.

But it's China that is causing most of the worry for fund investors, amid signs that the world's second-largest economy is slowing more sharply than expected.

Even emerging market bull Jim O'Neill, chairman of Goldman Sachs Asset Management, who famously coined the BRIC acronym, said he's been a bit surprised by the slowdown in China. But that said, O'Neill remains convinced China's economy will be more than enough to make up for any weakness in the other BRIC nations.

"It is making the trajectory that I predicted difficult to stick with," O'Neill said about the slowdown. But he added, "I find it hilarious that people question the thesis on the basis of two quarters."

BRIC HOUSE

The second quarter was not kind to BRIC-focused stock funds, with investors redeeming $787 million during the period, according to fund tracking firm EPFR. Chinese-focused funds were hit particularly hard, with investor redemptions totaling 88 percent of the $1.6 billion in new money those funds took in during the first quarter.

The rush of money out of Chinese funds comes as institutional investors are dialing back growth estimates. In a recent report, Ray Dalio's Bridgewater Associates attributed "about half" of the slowdown in global growth "to the slowdown in China."   Continued...

 
Employees work at a Sany assembly plant in Lingang Industrial Park, near Shanghai June 28, 2012. REUTERS/Carlos Barria