Credit Suisse Asia Equity Focus Strong inflows into Greater China, Korea and Taiwan funds

Greater China, Korea and Taiwan funds benefit from rotation flows

Global equities rebounded yesterday after bond yields in peripheral European nations including Spain and Portugal fell on reports that the European Central Bank was buying their debts. The Eurozone debt markets saw some signs of stabilization after China and Japan indicated that they would buy bonds issued by the European Financial Stability Facility (EFSF) later this month. Another report in the Wall Street Journal about the plans of European Union (EU) governments to increase the size of the EFSF further boosted market sentiment. The Euro Stoxx 50 surged 1.3% and the S&P 500 gained 0.4%. The markets will focus on Portugal's debt auction of up to EUR 1.25 bn later today, which will test investor appetite for Eurozone debt.
Investors will also seek clearer signals from next week's meeting of EU finance ministers regarding new plans to increase the size of the Eurozone bailout fund. Recovery in risk appetite dragged down the VIX volatility index to 16.89, which closed below 17.0 for the first time in the last 12 days.

The global equity markets started the New Year on a strong note, driven by increasing macro evidence of a global growth reacceleration, resurgence in investor appetite and continued global asset reallocation from government bonds into equities. After 22 consecutive months of net inflows, USD 7.7 bn was withdrawn
from US municipal bond funds in November 2010, while US equity fund flows entered positive territory in the same month. Last November, US equity mutual funds reversed the trend of net outflows since April and last December took in more new cash than bond funds – the first time since April 2008. Driven by a growing
dissatisfaction with near-zero returns on government bonds, US households have been directing their bond investments into equity funds. According to Emerging Portfolio Fund Research, international equity funds started 2011 with very strong inflows of USD 3.2 bn (0.35% assets under management) for the week ended 5 January, matching the weekly high of 2007 based on a percentage of assets under management (AuM).

Notably, inflows into emerging market equity funds have remained robust in the New Year, with USD 3.4 bn being taken up during the week ended 5 January. Within Emerging Asia, Greater China, Korea and Taiwan equity funds have reversed their net redemptions in the prior 4-week average and recorded strong inflows. During the week ended 5 January, Greater China, Korea and Taiwan equity funds accounted for 57% of total net inflows into non-Japan Asia equity funds. After the significant outperformance of the ASEAN equity markets in 2010, ASEAN equity funds have reported cumulative redemptions of 5% of AuM since mid-November, suggesting a rotation of investors from the lower-beta defensive ASEAN markets into the higher-beta and more cyclical North Asia markets, especially those that underperformed the Asian benchmark in 2010. We reiterate our constructive strategic view on Asian equities over the next 6–12 months and see attractive catch-up potential in our overweight markets of Hong Kong (Hang Seng Index 12M target of 30,500) and China (HSCEI 12M target of 16,500) due to their compelling risk-reward profile following the underperformance in 2010. The Hang Seng Index has gained 3.1% and the HSCEI has risen 1.8% since the beginning of this year, beating the 0.4% return of the MSCI Asia ex-Japan and the flat performance of
the MSCI Asia Pacific.