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US equity funds bear brunt of latest fears about policy and global growth

EPFR Global-tracked bond funds took in USD5.29bn during the week ending 14 November while net redemptions from equity funds hit their highest level since the week preceding the US Federal Reserve’s announcement of QE3.

Money market funds recorded outflows of USD7.06bn and balanced funds, which invest in both debt and equities, saw USD1.12bn taken out.

Investors did keep faith with China despite the mixed reviews garnered by the country’s new group of leaders. They also extended an inflow streak for mortgage backed bond funds that stretches back to 1Q11, steered fresh money into dividend equity funds for the 43rd time in the 46 weeks year-to-date and maintained long/short funds’ record of taking in fresh money every week so far this year.

Having jumped back in the previous week, retail investors jumped back out of EPFR Global-tracked emerging markets equity funds during the second week of November. Daily data showed overall flows peaking on 5 November and then tailing off as official confirmation of the Eurozone’s second recession in three years and the rapid escalation of Israel’s conflict with Hamas sapped investor confidence. Thanks to solid flows into Asia ex-Japan equity funds this asset class attracted fresh money for the 10th straight week, but inflows dropped to their lowest level since the fourth week of September.

Once again China equity funds stood out, accounting for over half of the total flows into Asia ex-Japan Equity Funds. Xi Jinping has been installed as the country’s new leader, heading a seven man standing committee whose reformist credentials are being widely questioned. But growth in the world’s second largest economy shows signs of regaining momentum and China equity funds have now attracted fresh money for 10 straight weeks. Flows into India equity funds also jumped to a five week high despite fresh data showing slower growth and higher inflation.

EMEA equity funds continued to struggle in the face of the Eurozone’s enduring problems, the impact of slowing global growth on Russia and South Africa’s commodities stories and Israel’s resumption of a hardline approach to Hamas and its control of Gaza. This fund group has recorded six straight weeks of outflows totalling over USD500m.

Since QE3 was announced three of the four most commonly cited emerging markets groupings have posted modest inflows while the oldest and most established, the BRICs (Brazil, Russia, India and China) theme was continued to struggle. Since mid-September over USD500m has flowed into funds under the MIST (Mexico, Indonesia, South Korea and Turkey) umbrella while frontier markets funds have posted inflows seven of the past nine weeks.

Enthusiasm for US equity funds fell off the so-called fiscal cliff during the week ending 14 November, adding to the pressure on EPFR Global-tracked developed markets funds from confirmation that the Eurozone has slipped back into recession.

Japan equity funds were the only major fund group to attract fresh money during the week, with domestically domiciled ETFs taking in over USD200m ahead to the government’s decision to call a snap election in order to break the current budget impasse. The opposition, who are expected to win December’s contest, are calling for even looser monetary policy.

In the US, with the presidential election done and dusted, the focus remains on the so-called fiscal cliff. US equity funds posted outflows for the seventh time in eight weeks, with both actively and passively managed funds experiencing net redemptions. There were modest inflows into mid cap growth and blend, small cap value and large cap value ETFs but these were swamped by outflows from other sub-groups.

US domiciled Europe equity funds kept up their recent inflow streak, which now stands at 14 straight weeks, but overall flows for this fund group were negative as investors digested the latest batch of data showing weak growth in the Eurozone core being more than offset by the struggles of its southern tier of members. But Italy, which accounts for a significant share of the southern tier’s debt stock, remains in favour: Italy equity funds took in fresh money for the eighth time in 10 weeks.

The major diversified developed markets fund group, global equity funds, saw their 10 week inflow streak come to an end.

Sector fund groups offering exposure to the tangible fared best during the second week of November. Commodities and real estate sector funds recorded by far the biggest inflows among the 11 major sector fund groups tracked by EPFR Global while consumer goods, financial and energy sector funds experienced the biggest redemptions.

In the case of commodities sector funds it was clearly concerns about asset values and developed market fiat currencies driving the flows, with gold and precious metals funds accounting for all of the week’s inflows despite evidence of weaker demand for gold from China.

Financial sector funds, meanwhile, posted their biggest weekly outflows since early May as the drumbeat of lawsuits, calls for higher taxation and tighter regulations, layoffs and restructuring drown out forecasts by some analysts of an earnings rebound next year.
Elsewhere, utilities sector funds posted back-to-back weeks of inflows for the first time since June while a less than stellar 3Q12 earnings season for technology majors was reflected in a seventh straight week of outflows for technology sector funds.

Fixed income investors see plenty of risks ahead, ranging from slower growth to policy gridlock in the US, and were noticeably more cautious in their Bond Fund allocations during the week ending 14 November. Flows into EPFR Global-tracked emerging markets and global bond funds fell to 11 and 13 week lows respectively, redemptions from high yield bond funds hit their highest level since early June and US investment grade bond funds took in over USD2bn for the second week running.

One risk investors are not overly concerned with is inflation. Despite the latest round of quantitative easing, inflation protected bond funds recorded outflows for the sixth time in the past seven weeks.

The redemptions from high yield bond funds were driven by US domiciled funds. Those based in Europe took in money for the 22nd straight week. The choppiness of recent flows is prompting some observers to ask if emerging markets debt is taking over from junk bonds as the risk asset of choice. Among emerging markets bond funds those with local currency mandates outgained their hard currency counterparts by a more than two to one margin, a reversal of the general pattern YTD.

Europe bond funds extended their longest inflow streak since 1Q12, but the pace of commitments moderated for the third week in a row. Once again Sweden bond funds stood out among the country fund groups. Italy bond funds also fared well, posting their biggest weekly inflow YTD.

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