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Emerging markets currencies

EM funds extend lead as rush to equities slowed by rocky macroeconomic terrain

Heading into the final week of January EPFR Global-tracked equity funds outgained bond funds for the seventh week running and emerging markets equity funds trumped developed markets equity funds for the seventh time in eight weeks.

But the pace of inflows ebbed again as recent European data and IMF forecasts prompted investors to take a more sober look at their assumptions for 2013. Equity funds did attract retail money for the third consecutive week, something they last achieved in February 2011.

Overall, equity funds absorbed a collective USD5.65bn - of which over 70 per cent flowed into emerging markets equity funds – during the week ending 23 January while bond funds took in a net USD3.71bn and money market funds saw USD6.78bn redeemed. Year-to-date equity and bond funds have posted inflows of USD39bn and USD18.7bn respectively versus USD15.82bn and USD17.84bn for the comparable period last year.

At the country and regional level China again stood out, with China equity funds posting their 20th consecutive week of inflows, while Turkey’s story attracted fresh money for the ninth week running.

Investors committed over USD4bn to EPFR Global-tracked emerging markets equity funds during the third week of January, with the flows following a pattern that has been in place since October which favours global emerging markets (GEM), Asia ex-Japan and China equity funds.

Investors continue to buy into the momentum shown by China’s economy. China equity funds maintained their position as second best performers among Asia ex-Japan country funds after Vietnam equity funds as they extended an inflow streak stretching back to September. While overall inflows slipped to a four week low retail commitments to these funds hit a 53 week high.

Hopes of increased Chinese – and US - demand for raw materials have improved investor appetite for Latin America equity funds in recent weeks. They took in fresh money for the fourth week running as flows into Brazil equity funds jumped to a 13 week high despite signals from the country’s central bank that inflation is supplanting growth as its biggest concern.

EMEA equity funds continue to struggle with geopolitical headwinds and uncertainty about the short term direction of commodity prices. Turkey, however, remains a bright spot with commitments to Turkey equity funds hitting their highest level since early 4Q10.

EPFR Global-tracked developed markets equity funds attracted money from retail investors for the third straight week, the first time that has happened since February 2011, but institutional flows remain well down from the levels seen coming into 2013 as the IMF joined the World Bank in forecasting slower than hoped for growth this year.

Europe equity funds took in fresh money for the eighth time in the past nine weeks as investors continue to buy into the idea the worst may be over for the region while finding little to like about most individual markets. Italy remains an exception, with Italy equity funds extending their inflow streak to 11 straight weeks thanks to attractive valuations, the country’s modest reform story and lower borrowing costs. At the other end of the spectrum France equity funds notched up an 18th consecutive weekly outflow.

For the second week running ETFs drove the overall outflows from US equity funds during a week when a key equities index made a run at a five year high. Retail flows continued to lose momentum but remained positive as funds managed with a value style outperformed their growth counterparts across all capitalizations.

Japan, meanwhile, is trying once again to break out of its deflationary trap with the Bank of Japan doubling its inflation target to two per cent and promising more aggressive sovereign bond purchases starting next year. But retail investors pulled money out of Japan equity funds for the first time in five weeks as the BOJ’s accompanying calls for fiscal discipline got more attention.

Global equity funds, the major diversified developed markets fund group, continued their strong start to the year – their best since EPFR Global started tracking them - by taking in another USD1.6bn.

The direct impact on flows into EPFR Global-tracked sector funds attributable to stronger US housing market and more encouraging Chinese economic data faded somewhat during the week. Real estate sector funds enjoyed another good week, taking in nearly USD1bn, but two fund groups that usually benefit from expectations of stronger growth – commodities and energy sector funds – both recorded net outflows.

Energy sector funds have now seen money flow out five of the past six weeks despite the resilience of oil prices and the cold weather that has parts of Europe and North America in its grip. Some longer term forecasts suggest that slower global economic growth, higher fuel efficiency standards for US automobiles, the likelihood Japan will restart its nuclear power plants and rising US energy production will pull oil prices consistently below the USD100 a barrel mark by 2014. But others suggest Chinese demand and lower production will put a floor under prices.

Another week of redemptions from gold funds was not offset this week by commitments to other commodities sector funds, resulting in a net outflow for the week.

Real estate sector funds followed up last week’s four year high with their biggest weekly inflow since 1Q07 as data confirmed existing home sales in the US during 2012 hit a five year high and the Bank of Japan’s latest policy initiative reinforced the perception that the current period of ultra-cheap money could run into next year and even beyond.

Industrials, infrastructure, financials, healthcare/biotechnology, telecoms, technology and utilities sector funds also posted inflows ranging from USD11m to USD373m.

US government bond funds posted their ninth straight week of outflows and emerging markets bond funds their 32nd consecutive weekly inflow as investors looked beyond the US during the third week of January in their search for yield. US high yield bond funds saw net redemptions of USD442m versus inflows of USD437m for Europe high yield bond funds and USD615m for all high yield bond funds.

The flows into Europe high yield bond funds, which extended their inflow streak to 26 straight weeks, were not enough to prevent Europe bond funds overall posting net outflows for only the second time in the past 14 weeks. Some investors are beginning to focus on the possible implications of the collective action clauses being applied to sovereign issues over one year’s duration.

The over USD1.5bn that flowed into US bond funds again favoured funds focused on municipal debt, bank loans and total return strategies at the expense of junk bonds and government debt. Long term US corporate bond funds also experienced their sixth outflow in the past seven weeks.

For the second week running local currency emerging markets bond funds absorbed over USD1bn, outgaining their hard currency counterparts by an over nine-to-one margin, while China bond funds posted their biggest weekly inflow over the past 18 months.

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