Russia improving relatively. Russia continues to look relatively very good among the major emerging markets, even allowing for some further slowdown in global growth. The positive picture will of course not allow Russia to post positive absolute returns in isolation of a negative trend elsewhere. But the relative performance picture does look a lot safer and if/when the global market rally extends further, Russia will continue to lead that through 2012. The domestic sector themes look best placed, especially after Prime Minister Vladimir Putin indicated the possibility of a one-off tax against companies privatized in the 1990's. Most of those are in the extractive industry sectors. That uncertainty is likely to weigh on sector performance until after the elections. 
The annual Doges carnival takes place in Venice this week.

GLOBAL GROWTH QUESTIONS

Questions over US and Chinese growth. The catalyst for Friday's global market decline was the worse than expected University of Michigan Consumer Sentiment Survey in the US. Economists expected the number to remain unchanged at 75.0, but instead it came in at 72.5. US Federal Reserve Chairman Ben Bernanke also warned, on Friday, that the weak housing market was hindering the Fed's efforts to stimulate growth in the economy. That came just after China reported a steeper fall in exports and imports for January and gives rise to fears of a faster slowdown than hoped for. Notwithstanding the New Year holiday period, economists had expected a fall of 3.6% for imports, while the actual fall was 15.3%. Also, in its monthly oil report, the IEA further cut the outlook for oil demand in Europe and the US this year because of fears of much slower economic growth. This week there are several key reports that will give a clearer picture of economic strength in both the US and Europe (see later in this note).

Weekly fund flow analysis - accelerating enthusiasm for em and russia exposure

Record inflow for EM funds. Investors added $5.8 bln to EM funds in the week ending Wednesday, according to data from EPFR Global. That is up from the $3.5 bln invested the previous week and brings the YTD total to $17.1 bln. Last week's inflow was the single biggest since EPFR Global started collecting the data and adds to what was already the best start to a year since 2006. Investors have become much more optimistic that the problems in the Eurozone will not contaminate growth prospects in emerging economies, even as Europe heads for recession. The low-growth outlook in the US and the negative growth forecast for Europe considerably boost the appeal of emerging markets.

Investors still shy of picking countries. However, while investors return in force to EM funds, they are less willing to actually pick individual country risk. Therefore, of the $5.8 bln invested last week, $5.2 bln, or 90%, was placed into EM Global Balanced funds. Of that money, 75% was invested via ETFs, as this is becoming the preferred vehicle for investment in the retail space. Greater flexibility and lower costs are among the factors driving growth in ETFs.

Russia boosted by EM Global allocations. Russia-dedicated country funds attracted new money for a second consecutive week. The total invested last week, $108 mln, or 0.8% of the AUM in this category, was less than the $237 mln invested in the previous week but was still better than for most other dedicated country funds. When aggregated with the allocation to Russia within the big EM Global funds, the total available for Russian equities last week climbed to $511 mln, or 1.0% of the AUM in this larger pool of money. The total new money made available for Russia exposure YTD is $1.2 bln, of which $348 mln has come via country-dedicated funds and 75% of that is via ETFs. Only 18% of the latest week's flow came via ETFs.

Eastern Europe is seeing inflows. Among the other big EM-dedicated country funds, China funds attracted $292 mln, or 0.8% of AUM, Taiwan funds lost $223 mln (2.7% of AUM), India funds took in $37 mln (0.2% of AUM) and Brazil funds reported redemptions of $18 mln. In the EMEA region, Turkey funds attracted $20 mln (1.2% of AUM) and the usually relatively inactive South Africa funds saw ETF inflow of $50 mln (2.1% of AUM). The Eastern Europe-focused funds attracted $48 mln in the past week, up from $25 mln the week before. BRIC-theme funds also had a rare positive week, with inflow of $253 mln. This fund category reported net redemptions almost every week in 2011.

Chris Weafer, is the Chief Strategist for Troika Dialogue