Christmas tree

Fund flows reflect pre-Christmas cheer about China, Eurozone and fiscal cliff

Flows into EPFR Global China equity funds hit a four year high during the week ending 12 December while Europe bond and equity funds both took in over USD1bn.

A modicum of faith that US lawmakers will not drive the country over the fiscal cliff and the Federal Reserve’s latest easing measures also bolstered risk appetite, with flows bypassing US Government bond, dividend equity and gold funds in favour of funds investing in emerging markets debt, junk bonds and emerging markets equity.

Dividend equity funds posted outflows for only the fifth time in the 50 weeks year-to-date and seventh time since the beginning of 2011.

Overall, EPFR Global-tracked equity funds posted net inflows of USD8.9bn during the week, over half of which flowed into emerging markets equity funds, while bond funds absorbed USD5.2bn which took YTD inflows over the USD460bn mark. Money market funds experienced modest redemptions totalling USD3.5bn.

With the US Federal Reserve tying its easing programme to a domestic unemployment rate of 6.5 per cent or better and some recent forecasts predicting China’s economy will grow at over eight per cent next year on its way to surpassing the US around 2030, investors flocked to diversified and Asia-focused emerging markets equity funds during the second week of December. Flows into global emerging markets equity funds hit a 44 week high while Asia ex-Japan equity funds recorded their biggest inflow since early 2Q08.

Speculation that China’s new leadership will institute a number of structural reforms early next year added to the enthusiasm generated by macroeconomic data showing growth in the world’s second largest economy beginning to pick up steam again. While two large China ETFs accounted for nearly 70 per cent of the week’s total inflows, over 30 China equity funds took in USD2m or more as investors bypassed Hong Kong and Greater China equity funds in favour of direct exposure.

Bullishness about China again failed to lift dedicated BRIC (Brazil, Russia, India and China) equity funds out of their doldrums. But the prospect of stronger Chinese demand for the region’s commodities exports did boost flows into Latin America equity funds to a six week high, with Peru equity funds posting the second biggest weekly inflow YTD.

EMEA equity funds, meanwhile, saw their current outflow streak hit 10 straight weeks in spite of the improving sentiment towards Europe that saw Poland equity funds record their largest inflow of the year. Geopolitical tensions in the Middle East and the effect of weaker demand for oil on key EMEA markets remain significant headwinds for this fund group.

The fact that the Eurozone remained intact at the end of another year and hopes that US lawmakers will cobble together a deal on the so-called fiscal cliff saw both US and Europe equity funds pull in over USD1bn during the week ending 12 December while flows into Japan equity funds stalled after four straight weeks of inflows ahead of Sunday’s general election.

Flows into Europe equity funds climbed to a 12 week high on the back of strong commitments to regional funds. Although US-domiciled Europe equity funds attracted fresh money for the 18th consecutive week, Europe-domiciled funds accounted for three-quarters of the week’s total inflow. Investors shrugged off fears that Italian Prime Minister Mario Monti, who plans to resign when the next budget is approved, will be replaced by an anti-austerity populist and remain much more concerned about France’s outlook. Italy equity funds posted inflows for the 12th time in the past 14 weeks while redemptions from France equity funds climbed to a 48 week high.

New leadership was also on the minds of investors looking at Japan as the world’s third largest economy slipped back into technical recession during the third quarter. The current government seems almost certain to be replaced after the election on 16 December by one committed to a more aggressive stance towards the Bank of Japan’s independence and sometimes difficult neighbours such as China and North Korea.

In the US, with elections over, Democratic and Republican lawmakers continue to spar over possible solutions to the fiscal cliff with the current consensus favouring an imperfect but workable agreement within the next month. That was not enough to tempt retail investors, who pulled money out of US equity funds for the 23rd straight week, but those redemptions were modestly offset by institutional commitments.

The major diversified developed markets fund group, global equity funds, recorded modest net inflows of USD57m for the week.

The three best performers among EPFR Global-tracked sector funds during the second week of December experienced outflows as investors shuffled their year-end exposure and took profits. Technology sector funds, which recorded a collective gain of 1.8 per cent, posted their biggest weekly redemptions in 74 weeks. healthcare/biotechnology (+1.8 per cent) and telecom (+1.7 per cent) sector funds also saw money flow out.

Although the US Federal Reserve affirmed its commitment to quantitative easing, usually a plus for real asset values, commodities sector funds’ 16 week inflow streak came to an end as they posted the biggest weekly outflows since late July. Investors pulled money out of gold funds as well. But they did steer nearly USD500m to real estate sector funds and over USD100m to financial sector funds.

Commitments to industrial sector funds hit their highest level in over 28 months ahead of better than expected US industrial production data and continued signs of a rebound in China’s industrial sector.

Yield hungry investors increased their exposure to Europe as the continued to migrate out of US Government bond funds in search of higher returns. High yield, Europe and emerging markets bond funds all took in over USD1bn during the week, with the latest commitments to EM funds pushing their YTD total into record setting territory.

Sweden again stood out at the country level as Europe bond funds extended their longest inflow streak since a nine week run ended in 2Q06. Over the past 12 weeks Sweden bond funds have taken in over USD1.5bn, more that they absorbed during the previous four years combined, as the Nordic country’s safe haven status and expectations of a rate cut have boosted flows.

Among the emerging markets country bond fund groups, China bond funds have stood out in recent weeks. The latest flows into this fund group were the biggest in over a year and extended their current inflow streak to 12 straight weeks. Overall, emerging markets bond funds with local currency mandates out gained their hard currency counterparts by a four-to-three margin.

US bond funds dedicated to Treasuries at the long end of the curve experienced their biggest outflows since mid-September as the US Federal Reserve tied its quantitative easing programme to a specific target for the unemployment rate. Short and intermediate term government bond funds also experienced redemptions while commitments to US inflation protected bond funds hit an 11 week high.

Flows into balanced funds, which invest in both bonds and equities, climbed to a 12 week high of USD758m.

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