China-Led Surge Drives Second-Largest Ever Weekly Inflow to Emerging Market Stocks, BofA Says

Emerging market equity funds attracted their second-largest weekly inflow on record, fueled by a massive influx of capital into Chinese stocks, according to a Bank of America note citing EPFR Global data. The report highlights a significant rotation by investors into risk assets and specific geographic regions.

Record Flows into Emerging Markets

In the week ending July 22, investors poured $29.6 billion into emerging market equity funds. The majority of this capital was directed toward China, which saw $21.3 billion in inflows, its third-largest weekly total ever. South Korean funds also saw strong interest, adding $1.5 billion.

This move into emerging markets was part of a broader shift into risk assets, according to the report from BofA strategists led by Michael Hartnett. Key weekly flows included:

• $30.4 billion into global stocks
• $14.9 billion into bonds
• $33.9 billion out of money-market funds

Diverging Regional Trends

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The surge into emerging markets contrasted sharply with renewed outflows from major developed markets. U.S. equity funds saw withdrawals of $7.2 billion, while European funds lost $1.6 billion. U.K. equities experienced their largest outflow since November, at $1.2 billion.

In contrast, Japan continued to attract capital, logging its seventh consecutive week of inflows with an additional $1.5 billion. Within sectors, technology funds drew $4 billion, bringing their four-week total to a record $52.8 billion, while financials saw their largest four-week haul since January 2022.

Strategist's Cautious Outlook

Despite the strong inflows, Hartnett flagged several indicators that challenge the market's "boom" consensus. He noted that a proprietary index of semiconductor stocks is down 21% from its June peak, and the Roundhill Magnificent Seven ETF (NYSE:MAGS) is struggling to hold its 200-day moving average.

For a potential reversal of the current market trend, Hartnett suggested investors consider long positions in defensives and duration, while shorting sectors like banks, tech, and industrials. On a long-term basis, the strategist identified Hong Kong property stocks as a top secular buy, noting the sector trades at a 30-year low.