Emerging markets offer slight hope as they gain some favour again

London: Although emerging market stocks have suffered this year and were hammered in 2008, investment flow data suggests they may be gaining some favour.

State Street said last week that general cross-border equity flows have been running at historically low levels for nearly six months. Specifically, it said that such flows have been in the 10th percentile, or higher on 90 per cent of previous occasions, for 118 trading days. Flows to emerging markets, however, have lately moved into the 74th percentile - that is, pretty high.

"This is the highest level since July 2007, before the phrase 'credit crunch' had entered the popular lexicon," the US financial services firm said in a note.

Fund tracker EPFR Global had a similar story to tell. It said there were solid inflows early to mid-month into the global emerging, Asia ex-Japan and Latin America funds it watches. By contrast, European and US equity funds saw net outflows.

It is not immediately obvious from stock market performances themselves that this is the case. MSCI's main emerging market stock index has fallen more than 10 per cent this year.

But over the weeks the index has either outperformed or matched its developed market counterparts, a far cry from usual patterns in times of stress.

Heading into the current economic crisis, many investors argued for "decoupling", the idea that while the US economy would tank, others, particularly the dynamic BRICs (Brazil, Russia, India, China) would prop up the world.

This, as State Street put it, has turned out to be a pipe dream. Russia is expected to experience its first recession in a decade this year. The once-buoyant economy has fallen prey to a fall in global demand and lower prices for key exports such as oil.

India and Brazil are also heading for slower growth as developed economies find less use for their output.

But it is China that has many investors most worried. Its economic growth slumped to 6.8 per cent last quarter, dragging down the pace of expansion for all of 2008 to a seven-year low of 9.0 per cent. That might sound fairly good - certainly in comparison with actual retractions in places like Britain - but by Chinese standards it is near recessionary.

Some analysts have been worrying that a Chinese hard landing will be the final nail in the coffin for the world economy, burying it in depression. One fear is that a collapsing economy could prompt China to devalue the yuan currency, triggering a trade war.

"Given the importance of China in terms of its potential to be a source of global growth and given its massive net-creditor position mainly with respect to the US, a slow down to 6 per cent or below in China's growth rate would have significant impact on the already weak global economy," the World Economic Forum said.