A year that saw most EPFR Global-tracked emerging markets equity and bond funds struggle despite rising risk appetite ended with China equity funds absorbing over USD1.5bn during the 10 days ending 30 December while developed markets equity funds added to their already record setting inflow totals and bond funds overall recorded modest outflows.
“Bar the possibility of another fight over the US debt ceiling and the impact of the hike in Japan’s sales tax in 2Q14, there isn’t too much on the immediate horizon that is likely to shake fund flows out of their current pattern,” says EPFR Global research director Cameron Brandt. “Investors have had plenty of time to prepare for the tapering of QE3, there’s a two-year budget deal in place in the US, monetary policy in Japan and the Eurozone is expected to remain largely unchanged, tensions in the Middle East have eased and China is expected to maintain a growth rate around 7.5 per cent.
Based on monthly and daily data, preliminary numbers for 2013 show all four of the major developed markets equity fund groups – US, Europe, Japan and global equity funds – setting inflow records. Also establishing new marks were industrial and healthcare/biotechnology sector funds, Europe and floating rate bond funds, balanced funds and frontier equity funds. The strong inflows into the DM equity fund groups, allied to record setting redemptions from US and emerging markets bond funds, kept alive the narrative of a ‘Great Rotation’ from fixed income to equities.
The strong flows into frontier markets funds are an illustration of the enduring yield hunger and rising risk appetite evident in 2013 which saw investors pour record setting amounts into Spain equity and bond funds. Among retail investors that risk appetite fell off sharply during the final two months of the year when they pulled over USD19bn from both bond and equity funds.
In contrast to 2013, when EPFR Global-tracked emerging markets equity funds carried a 16 week inflow streak into the New Year, this fund group limped into 2014 having posted outflows for 10 straight weeks. Fears that less accommodative US monetary policy will put pressure on the structural weaknesses that many major emerging markets have failed to address, the perception that the commodities super cycle may be on a downswing and policy issues in key markets have contributed to the absence of any fresh retail money since the first week of April and a third consecutive quarterly outflow for the first time since 2000.
As 2013 drew to a close, however, Asia ex-Japan equity fund flows gained some momentum on the back of solid commitments to China and Korea equity funds. In the case of China equity funds, which still ended the year with record setting outflows racked up in the second and third quarters, foreign money was the driver while the bulk of the flows into Korea equity funds were won-denominated. Managers of the big diversified global emerging markets (GEM) equity funds also focused on these markets; average GEM fund allocations to Korea and China in early December were at six year and record highs respectively.
Improving sentiment towards China has done little for Latin America equity funds so far. They had their worst year, in terms of flows, on record as investors focused on Brazil’s slowing economy, the indifferent outlook for commodity prices and the potential impact from the winding down of the US Federal Reserve’s current quantitative easing programme.
Brazil’s woes also helped extend dedicated BRIC (Brazil, Russia, India and China) equity funds’ outflow streak, which now stretches back to the first week of November 2012. But other EM ‘themes’ fared well, with frontier equity markets funds setting a new inflow record and funds grouped under the MIST (Mexico, Indonesia, South Korea and Turkey), MINT (Mexico, Indonesia, Nigeria and Turkey) and CIVETS (Colombia, Indonesia, Vietnam, Egypt, Thailand and South Africa) umbrellas all ending the year in positive territory.
EMEA equity funds struggled for the third year running as Russia’s lacklustre growth and the big current account deficits run by key markets such as Turkey and South Africa deterred investors. Those investors also lost their appetite for Emerging Europe during the fourth quarter, the Eurozone’s recovery notwithstanding, as economic policymaking in the region veered towards the Russian rather than developed European model.
EPFR Global-tracked developed markets equity funds enjoyed a banner year as the US economic recovery ground on, Japan opened the monetary spigot and the Eurozone crept out of recession during the second quarter. Although the Fed’s decision in December to start winding down QE3 gave investors pause for thought, the year ended with more money flowing into US, Europe, Japan and global equity funds.
In terms of net flows as a percentage of assets under management at the beginning of the year, Japan equity funds were the clear winners in 2013. New Bank of Japan Governor Haruhiko Kuroda’s bold plan to expand the country’s monetary base in an effort to rekindle growth and inflation, which was unveiled in early 2Q13, convinced foreign investors that Japan’s leaders were serious about jump-starting the economy. It also drew domestic investors back to their home market, although yen-denominated flows levelled off towards the end of the year as locals took profits.
Once again it was commodity sector funds that caught the eye at year’s end. But, after attracting the most money among the 11 major EPFR Global-tracked sector fund groups for four straight years, this group ended 2013 having posted the largest outflows as questions about trend growth in China and the unwinding of positions established to hedge against QE-induced dollar weakness took their toll.
