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China and corporate debt funds shine as fears about Europe continue to ebb

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Several fund groups that have been on thin rations for lengthy periods of time saw significant amounts of fresh money during the third week of January as hopes the Eurozone debt crisis will be brought under some degree of control – and its broader risks contained – were bolstered by the IMFs request for additional resources. Europe Bond and China Equity Funds posted their biggest weekly inflow in over two years, flows into dedicated BRIC Equity Funds climbed to a 60 week high and Latin America Equity Funds enjoyed their best week since late July.

Overall, EPFR Global-tracked Bond Funds absorbed a net USD4.35 billion and Equity Funds USD2.8 billion while Money Market Funds posted outflows of USD11.93 billion. Year to date inflows for those three fund groups now stand at USD14.2 billion, USD7.4 billion and USD5.9 billion respectively. During the comparable period last year Equity Funds had already absorbed over USD24 billion versus USD2.9 billion for Bond Funds and outflows of USD49.3 billion for Money Market Funds.

The strong preference among equity investors for ETFs remains unchanged: YTD commitments to this type of fund accounts for 116% of the total inflows for all equity funds.

"Investors are starting to pencil in a lot of quantitative easing, interest rate cuts and fiscal stimulus to their assessment of the global economy’s prospects, with all that means for growth, yields and inflation" noted EPFR Global Director of Research Cameron Brandt. "They remain wary of equities. But flows into higher yielding forms of debt are picking up and Inflation Protected Bond Funds have posted inflows 10 of the past 12 weeks that total over USD2 billion."

EPFR Global-tracked Emerging Markets Equity Funds extended their longest inflow streak since early 4Q11 during the week ending January 18 as commitments to Asia ex-Japan Equity Funds climbed to a 10 week high on the back of renewed interest in China and the diversified Global Emerging Markets (GEM) Equity Funds took in over USD1 billion for the second week running.

The latest macroeconomic data from China suggests slower, more broadly based growth that is beginning to take some of the pressure off prices, thereby affording policymakers room to support growth — which is still running at close to 9% — if need be. Over USD600 million flowed into China Equity Funds, most of it from institutional investors, making it their best week since late April, 2010.

This renewed enthusiasm for China’s prospects was also good news for Brazil and dedicated BRIC (Brazil, Russia, India and China) Equity Funds, with flows into the former hitting a seven week high ahead of another cut in the country’s key interest rate. Brazil’s appeal to foreign investors has also been bolstered by the unwinding of some capital controls.

EMEA Equity Funds, however, continue to struggle as slowing growth in the European Union clouds the outlook for Emerging Europe and Russia and the bills for Hungary’s unorthodox economic policies come due. Emerging Europe Regional Equity Funds posted outflows for the 36th time in the past 37 weeks, offsetting the best week for Turkey Equity Funds in eight months.

US Equity Funds again dominated the flows into Developed Markets Equity Funds during the third week of January as the world’s largest economy generated more encouraging macroeconomic data and fourth quarter earnings reports generally exceeded reduced expectations. Retail investors continue to see developed market gains as something to be booked. They have now redeemed money from Europe, Global and US Equity Funds for 35, 29 and 28 consecutive weeks respectively.

While growth was a key driver of sentiment towards US equities, with US Equity Growth Funds again outperforming their Value counterparts across all capitalizations. Flows out of Europe Equity Funds reflected expectations that the region will do well to avoid a recession during the first half of the year. Germany Equity Funds again posted outflows, tying their longest redemption streak since late 2Q08, despite recent improvements in business and investor confidence.

Japan Equity Funds, which posted net inflows last year for the first time since 2005, also remain under pressure. Safe haven flows have bid up the country’s currency, eroding the competitive advantage of key export sectors, while solutions to the longer-term challenges of deflation, deficits and demographics remain elusive.

Both of the major diversified developed markets fund groups recorded modest inflows. Pacific Equity Funds extended their longest inflow streak since early 2Q11 while Global Equity Funds absorbed fresh money for the third time in the past four weeks.

Flows into Global Sector Funds favoured neither growth nor performance during the week ending Jan. 18. Four of the top five fund groups by performance suffered redemptions during the week and of the groups usually associated with growth only Energy Sector Funds stood out. Flows into this group jumped to a 10 week high of USD732 million, nearly three times the amount taken in by the fund group posting the second largest inflows.

Commodities Sector Funds continued their lacklustre start to the year, experiencing net outflows for the fourth time in the past five weeks as investors pulled money from gold and precious metals funds and from actively managed industrial metals and soft commodities funds. Commodities ETFs, meanwhile, took in over USD300 million.

Elsewhere, Technology Sector Funds recorded outflows for the fifth straight week despite turning in the best performance among the 10 major fund groups as uninspiring guidance for earnings growth this year continued to weigh on investor sentiment. But Healthcare/Biotechnology Sector Funds took in another USD66 million that kept their YTD total in first place ahead of Real Estate and Energy Sector Funds.

The growing consensus that the Eurozone will get to grips with — if not solve — its debt crisis this year saw EPFR Global-tracked Europe Bond Funds record their biggest inflow since the second week of July, 2009, as investors stepped up their search for yield. Flows into Emerging Markets Bond Funds climbed to a 10 week high, High Yield Bond Funds absorbed over USD1 billion for the third consecutive week as they extended their longest inflow streak since 2Q11 and Municipal Bond Funds took in another USD870 million.

US Bond Funds took in fresh money for the 11th week in a row. But investors rotated out of funds dedicated to short term debt, where yields have plunged, with some of that money going to funds specialising in corporate bonds. Redemptions from Short Term Government Bond Funds jumped to an 11 week high while commitments to Long, Intermediate and Short Term Corporate Bond Funds hit 10, six and 17 week highs respectively.

The interest in higher yielding corporate debt extended to Europe and emerging markets. Europe Corporate Bond Funds recorded their biggest inflow in over a year and Emerging Markets Corporate Bond Funds enjoyed their best week since early August. Corporate bonds have outperformed as more high quality companies have turned to this market in lieu of scarce bank loans.

Among the other asset classes, Floating Rate Bond Funds posted inflows for only the second week since mid-July while Mortgage Backed Bond Funds extended an inflow streak running back to the first week of March, 2011.

Balanced Funds, which invest in both bonds and equities, continue to struggle. YTD inflows stand at USD6 million versus USD771 million for the comparable period last year.
 

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