Citigroup-India Redemptions Reach $ 7 bn, expect another $ 7 bn Outflow in H2 CY08

Three points from our latest note:

1. Six weeks of redemptions totaled $6.6b while regional markets fell 16% — With Asia ex Japan being the worst performing region globally last month and also YTD, outflows from Asian funds persist without surprise. According to EPFR Global, weekly redemptions from offshore Asian funds were in the US$1.4b-1.6b range most of the time in June and total outflows of US$4.8b were the second-biggest monthly outflow in history.

2. US$6b redemptions in 2H to replay the last episode — YTD net outflows total US$11.4b or 5.5% of Asian funds’ AUM. Comparing this with 8.4% being redeemed in the 2001 global growth slowdown, we would need US$6b outflows in 2H to replay the last episode.

Asian valuations remain above average, but earnings growth is below average. Together with shrinking domestic liquidity and deteriorating investment sentiment, we reiterate 15% downside on MXASJ.

3. Cash levels at Asian funds are nowhere to suggest a bottoming of Asian markets — Current cash weights of 2.2% are 120bps below historical averages. Contrasting this with 6% and 16% for 2001 and 1998 market troughs, respectively, Asian funds are fully invested and will have to sell what they are overweight, i.e. ASEAN markets, to meet further investor redemptions. We advocate avoiding the crowd and prefer North Asia (ex China ) to ASEAN.