Yet, we maintain a constructive view on EM for 2H16

　　The UK’s referendum decision to leave the EU should exert pressure on EM financial assetsand capital flows in the near term as a result of a broad-based risk-off environment andheightened global volatility. Yet, we maintain our constructive view on EM for 2016 given low forlonger G3 rates and improving EM macroeconomic conditions (Emerging Markets, Stillconstructive on EM: Our multi-asset views, 2 June 2016). Clearly, any change in this viewwould require a reassessment of the EM panorama but our global macro-strategy view does notforesee a drastic turn, at least not at this stage.

　　EM policymaker action to manage the UK’s exit process smoothly is key, so the element ofuncertainty will be there for a while. Selective opportunities will exist within the EM spacedepending on the economic and financial exposures of individual countries to the UK andEurope, in our view. While CEEMEA is the most exposed, Asia and LatAm are less so. Wereckon that EM FX rather than rates are more sensitive to current risk-off conditions (EmergingMarkets: Fallout from Brexit, 24 June 2016).

　　Net inflows into EM and DM bond funds but redemptions from equity funds, in the week ended22 June. Among EM funds, net bond inflows were skewed to China bonds while equityredemptions concentrated in China and Taiwan. Within DM funds, major net outflows from USand European (Germany and UK) equity funds but strong deposits into US bond funds.

　　HSBC’s early signalling system suggests cautiousness for EM funds (pg 14). Daily financial accountportfolio flows to seven countries shows gains in bonds (S. Korea, S. Africa and Thailand) andequities (S. Africa and Brazil) (p. 15). HSBC’s EM fund flows momentum (p. 5), dispersion indicators(p. 8) and institutional and retail demand (p. 13) also show stable appetite for EM risk.

　　Next week, investors will focus on global manufacturing indicators from the US, EU andChina/EM to get a sense of the growth differentials between EM and DM.