Emerging-market fund flows diverge: Chinese ETFs signal renewed buying, foreign investors keep selling Taiwan, and Indonesia faces index downgrade
Goldman Sachs monitoring shows that emerging-market fund inflows are driven mainly by passive money. China shows signs of renewed buying by the “national team,” while foreign selling pressure in Taiwan persists; Indonesia’s removal from the MSCI Emerging Markets Index could trigger 5.6 billion dollars in passive outflows.
Original source：Goldman SachsFirst published on Unhidea：Original source date：
Key takeaway
Emerging-market fund subscriptions remain strong, but active allocations, foreign trading in local markets and passive flows are moving in different directions. Assessing buying strength requires understanding where the money comes from.
Emerging-market funds keep attracting money. Why are foreign investors still selling?
Global emerging-market equity funds (GEM) recorded net inflows of approximately 2.8 billion dollars this week, including 2.7 billion dollars into passive funds and only about 100 million dollars into active funds. Year to date, passive funds have attracted 84.9 billion dollars, while active funds have lost 16.4 billion dollars: new money has come mainly from index-tracking products.
Fund subscriptions and foreign purchases and sales of shares in local markets are different measures. This week, foreign investors were net sellers of 8.9 billion dollars in Asian emerging markets excluding China and approximately 200 million dollars in non-Asian emerging markets. Fund inflows and selling pressure in the market are occurring simultaneously.
Brazil also shows this divergence: foreign investors sold a net approximately 200 million dollars in the week before the runoff, but have bought a net 9 billion dollars year to date, still the highest among emerging markets. Brazil remained the most overweight market among active emerging-market funds in September. One week of outflows has not changed its lead in flows for the year.
China’s buying is recovering. Who is doing most of the buying?
The ten largest ETFs favoured by the “national team” received net inflows of approximately 170 billion yuan over the past two weeks. Inflows this month through 22 October were close to the highest monthly level of the past three years. On that basis, Goldman Sachs believes the national team may have resumed buying; the assessment comes from ETF subscription signals.
China-dedicated equity funds recorded net inflows of approximately 17 billion dollars this week, including inflows of approximately 17.3 billion dollars into passive funds and outflows of approximately 200 million dollars from active funds. Over the same period, southbound flows recorded net outflows of 2.2 billion dollars, showing that buying of A-share ETFs and mainland investors’ allocation to Hong Kong stocks were moving in different directions.
Meanwhile, Goldman Sachs Prime Services data show that, as of 21 October, net exposure to China was 6.9% and gross exposure was 6.5%, both around the 7th percentile of the past year. While ETF buying has strengthened, this group of funds’ China exposure remains near a one-year low.
How concentrated is foreign selling pressure in Taiwan, and how much can local investors absorb?
Foreign investors were net sellers of 7.6 billion dollars in Taiwan this week, accounting for approximately 85% of the 8.9 billion dollars in net foreign selling across Asian emerging markets excluding China. Cumulative net selling in October reached 26.5 billion dollars, so the pressure was not confined to a single week.
Local money moved in the opposite direction: Taiwan’s non-institutional investors bought a net 4.1 billion dollars this week, while domestic institutions bought a net 1.4 billion dollars. Their combined purchases were still below net foreign selling. Local buying cushioned the funding gap but did not fully offset foreign outflows.
Active fund positioning was also cautious: in September, active emerging-market funds were underweight Taiwan by 460 basis points, a further reduction of 40 basis points from the previous month; by sector, they continued to reduce holdings of North Asian semiconductors. Taiwan therefore faced both trading-related selling pressure during the week and reduced active allocations. The September holdings data are preliminary and cover approximately 55% of reported assets.
Indonesia’s valuation is already low. Why is an index downgrade still a key pressure?
MSCI proposes to reclassify Indonesia from an emerging market to a standalone market and expects to decide by June 2027 at the latest. Goldman Sachs estimates that, if implemented, passive funds tracking MSCI indices could see outflows of 5.6 billion dollars; if FTSE Russell follows suit, an additional 2.7 billion dollars could flow out.
Relevant active funds separately hold approximately 8.1 billion dollars in Indonesian equities. Whether they sell depends on each fund’s own decisions and cannot be added directly to passive outflows. In September, active emerging-market funds and Asia ex-Japan funds remained overweight Indonesia by 20 and 70 basis points respectively, so active holdings had not shifted entirely to an underweight position.
The Indonesian index’s forward 12-month price-to-earnings ratio has fallen to 7.6 times, its lowest since the global financial crisis, but remains above the 5.1 times recorded during the crisis and approximately 3.9 times in 2001. Goldman Sachs believes valuations may not yet have bottomed; its historical examples show that recently downgraded emerging markets typically underperform their benchmarks for two to three months following the initial consultation announcement.
