Excellent analysis piece from Bloomberg Markets, my fav biz mag, on global capital flows to developing and frontier markets. Some call it emerging markets, but we need to divide them to developing and frontier to be more precise. Following the sub prime crisis and the subsequent Euro-crisis, the trend towards more exposure for emerging markets should be increased. 
How investors allocate their funds is what we call capital flows. Owing to the size of the recipient countries, such flows can make a huge difference to these markets. As much as investors can plough into MSCI markets, they can also take out funds. Last year, the MSCI valuations dropped some 20% on the view that the Europe's debt crisis would curb global growth. In January 2012, the figure was 30% off its historical average.
Realising a calmer settlement to the Greece-led debacle, it is fair to say that valuations and funds should start coming back to MSCI countries. However, not all will benefit in the same manner, fund managers will index some of their holdings but many will allocate according to "outlook".
Using IMF data 2012-2016, Bloomberg Markets have created a top markets for attractiveness:(country) (cumulative GDP growth) / (gov debt/GDP) / PE / (ease of doing business, lower the better)1 China 46.7% / 16% / 11.5x / 912 Thailand 23.3% / 45.3% / 12.5x / 173 Peru 23.7% / 13.6% / 11.6x / 414 Chile 19.4% / 10.7% / 18.2x / 395 Malaysia 18.6% / 56.8% / 17.3x / 186 Poland 19.7% / 55.9% / 8.3x / 627 Turkey 16% / 35.4% / 11x / 718 Russia 23.3% / 15% / 5x / 1209 Indonesia 30.3% / 21.4% / 16.7x / 12415 India 35% / 60.7% / 15.3x / 132
There are a few notables, the BRICs which were the flavour of the decade, have slipped enormously. Despite China still holding onto the number one position, its attractiveness in terms of growth has slowed, and that is understandable owing to the much larger base that they have grown to. Brazil has dropped out of the top 15, mainly owing to very exorbitant inflation and extremely high PE valuations. India has also dropped to #15 mainly due to inflation which is expected to average 6% for the next few years.
One main determinant in attractiveness, which I have not put up is inflation rate expectations. The ones downgraded have exceptionally high inflation, which cancels out much of the growth and puts in a lot of side economic and operating problems. Russia's inflation is expected to average 6.8%, while the rest are maintaining below 3%.One can also argue that certain countries published inflation rate may be managed, which may explain why China is not as attractive now despite posting a likely inflation rate of just 3.1% for the next few years as many deem that to be way understated.
Indonesia which is way more favoured by foreign funds than Malaysia is ranked lower because of its 5.3% inflation rate. Malaysia seems to come out well from the rankings, and must continue to improve its ease of doing business as that has helped a lot. However our government debt as a percentage of GDP has to come down to below 30% soon or it will just spiral out of control. Inflation is at 2.4% but we all know its actually closer to 3.5%, don't we. We also have the problem of managing inflation via excessive subsidy, and that is a bad thing. The sooner we dismantle them except for critical items, the better.
One bad sign creeping in among big listed Malaysian firms is the "tidak payah" attitude in soliciting foreign funds investment. A couple of international houses which did major roadshows to the US and Europe saw only a couple of Malaysian firms willing to join while they get some 15 firms from Indonesia. Is it because many of them are GLCs? But even the multi millionaire Malaysian owners are not keen. While the Indonesian contingent are made up of mostly billionaire owners - go figure.
I believe this attitude stems primarily from the local funds (PNB and EPF) being very substantial shareholders of many of the Malaysian big listed firms. This is not a good development for many reasons. When everything is so cosy, there tend to be too much government to big listed firms contract given at the expense of smaller players. Business becomes for the big boys only. The cosier the relationship, the more likely you are to be loose on corporate governance, related party transactions and even transparency issues.
We have to ask ourselves honestly, are we propping up the listed index with our own money? If we reduce EPF and PNB funds by half, will foreign funds come in to buy? If not, do you know why? Or we just don't care! 
Its significant, maybe expected, but until they come out to say so, it was still a big unknown. China took its time to see how the E.U. went about trying to solve their own crisis. The fact that China took this step was inevitable as it has just as much to lose with Europe being a major trading partner.
As things stand the Chinese government were already getting anxious over the tightening effects in their own economy. As recent as a month back, Beijing has suddenly loosen the purse strings by reducing the statutory reserve requirement demanded on banks. This was seen as a major move acknowledging that they have tightened too much or the domestic economy is suffering too much from the shrivelled exports to Europe.
The E.U. can keep throwing funds at their problems but it is the missing link of who will continue to buy the government bonds of the weaker E.U. nations that saps confidence over any given solution. This may not absolutely clears the air over E.U. crisis but is certainly a major step to solving the puzzle.
From Reuters:
China will continue to invest in euro zone government debt, the country's central bank governor said today, while calling on Europeans to produce more attractive investment products for China.
Zhou Xiaochuan admitted that China and other emerging nations like Brazil, Russia or India were waiting for the right time to help the bloc, after a European Union state visit was once again met with encouraging words but no concrete public commitments on fresh funding from China.
But he also suggested Europe needed to work harder to entice Beijing to part with its capital.
"We also hope that the euro zone and EU can innovate their mechanisms to offer new products that are more helpful for Sino-Europe cooperation," he said.
The central bank governor reiterated previous comments from Premier Wen Jiabao that China was ready to play a bigger role in solving Europe's debt problems, noting China had not cut its reserves exposure to the euro zone.
"At the G20, our state leaders promised European leaders that, amid the global financial crisis and the Europe sovereign debt crisis, China will not cut the proportion of euro exposure" in its reserves, Zhou said in a speech at the University of International Business and Economics in Beijing.
Although Zhou's comments largely underlined China's established stance, the remarks helped push the euro to an intraday high of $US1.3163. Traders said some investors were short of the currency, which had exaggerated the rise.
Any bigger role in solving the debt crisis would be via the International Monetary Fund and the European Financial Stability Fund, or EFSF, Zhou said, echoing Wen's comments.
"We strongly believe European countries can work together to handle the challenges. They are able to solve the sovereign debt crisis," Zhou said.
"The People's Bank of China has always maintained close cooperation and contacts with the European Central Bank, and we support each other in many policy aspects. The PBOC firmly supports the ECB's recent measures to address the difficulties."
Verbal reassurances from Zhou and senior Chinese leaders come as European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso are visiting Beijing for a China-EU summit.
Van Rompuy assured his Chinese hosts that they should not underestimate the strong political incentive to keep the euro zone intact.
The summit was delayed from late last year as European leaders struggled to deal with an escalating debt crisis.
China, with $US3.2 trillion worth foreign exchange reserves at hand, is seen as having the potential financial firepower to bail out some European governments.
Beijing has been consistently reluctant to make firm financial commitments, although it has repeatedly said it supports a stable euro.
Analysts estimate that about a quarter of China's foreign reserves are held in euro-denominated assets.
The head of China's sovereign wealth fund said on Monday that hard assets are more attractive than European government bonds.
Chinese leaders have expressed alarm at protests and strikes sweeping Europe, while lauding a fiscal agreement to be signed in March that will build up a massive fund to backstop European debt.
"We believe the fiscal agreement will mark a big step toward closer economic and fiscal union, which will significantly boost EU member countries' fiscal sustainability and improve the sovereign debt conditions," Zhou said.
China and other countries beyond the 17-country euro bloc want to see its members stump up more money before they commit additional resources to the IMF, which had requested an additional 500 billion euros in funding.
The European Stability Mechanism (ESM), a 500-billion-euro permanent bailout fund that is due to be operational in July, is expected to replace the EFSF, a temporary fund, which has been used to bail out Ireland, Portugal and will help in the second Greek package.
Detailed policies and reforms to be launched by Europe can serve as "platforms" for China and other BRICS countries to help Europe, Zhou said.
Read more:
http://www.smh.com.au/business/world-business/china-vows-to-keep-investing-in-euro-zone-debt-20120215-1t5q9.html#ixzz1mRI4BuhZ
