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EM Equity Funds win a round as headwinds build

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The second week of April saw EPFR Global-tracked Emerging Markets Equity Funds post bigger inflows than their developed markets counterparts for the first time year-to-date as high energy prices, a mixed start to the first quarter earnings season, Portugal’s debt problems and Japan’s ongoing nuclear crisis sapped investor optimism about the prospects for most G7 economies.

 

This renewed appreciation for the better debt profiles and growth prospects of many emerging markets was not confined to equity investors. Emerging Markets Bond Funds also took in more money than US, Global or Europe Bond Funds.

Investors retained their enthusiasm for Germany and Russia, their aversion to Eurozone and US Municipal debt and their hunger for yield. But they also reassessed the outlook for the energy sector and pulled money out of Frontier Markets Funds for the sixth time in the past eight weeks.

In contrast to the previous week, when 22 of the 25 major fund groups tracked by EPFR Global posted inflows, only 15 took in fresh money during the week ending April 13. Money Market Funds absorbed the lion’s share, taking in a nine week high of USD10.37 billion versus USD3.2 billion for all Equity Funds and USD531 million for Bond Funds.

Emerging Markets Equity Funds posted inflows for the third straight week, a run that has seen them shave USD10.3 billion off YTD outflows that stood at over USD26 billion going into the final week of March. Investors showed a preference for diversified exposure with Global Emerging Markets (GEM) Equity Funds accounting for over 80% of the week’s total inflows. EMEA and Asia ex-Japan Equity Funds also posted inflows while Latin America Equity Funds experienced net redemptions for the 12th time in the past 13 weeks.

Russia continues to shine at the country level thanks to its commodities and energy story. Although some fund managers are beginning to question current valuations, investors committed fresh money to Russia Equity Funds for the 26th time in the 28 weeks since the beginning of 4Q10. Two other sub-groups in the EMEA universe, Turkey and Emerging Europe Regional Equity Funds, also extended recent inflow streaks as optimism about Germany — a key trading partner and, in the case of Turkey, a source of remittance flows — remains at high levels.
 
With optimism about the US and its appetite for Asian exports taking a knock from the latest consumer spending data and China raising interest rates again flows into Asia ex-Japan Equity Funds were less than a 10th of the previous week’s total. But Korea Equity Funds had another solid week as investors bet that Korean exporters will benefit from Japan’s troubles by grabbing additional market share.
 
Latin America Equity Funds ran into fresh headwinds as Brazil expanded its capital controls and nationalist Ollanta Humala, seen by many as a man in the same mold as the current leaders of Venezuela and Bolivia, emerged as one of the two candidates for June’s run-off for Peru’s presidency.

Flows into EPFR Global-tracked Developed Markets Funds slowed sharply during the week ending April 13 as investors digested the Eurozone’s ongoing debt crisis, the European Central Bank’s shift to a tightening bias, the impact of high oil prices on growth and consumption in the US and Europe, a mixed start to the 1Q11 earnings season and Japan’s struggle to contain the radiation leaking from the stricken Fukushima nuclear power plant.
 
Of the five major developed markets fund groups Europe Equity Funds posted the biggest inflows for the week. Behind the overall number, however, was a big shift away from regional funds to those concentrating on Germany with strong institutional commitments helping Germany Equity Funds post their biggest weekly inflow since the second week of May, 2010.
    
Japan Equity Funds recorded outflows for the third consecutive week as authorities upgraded the severity of the crisis at the Fukushima plant and downgraded the outlook for the economy, foreign brokerages turned sour on key sectors and the post-tsunami cooperation among the country’s political parties began to unravel. Retail investors have now pulled money out of this fund group for six straight weeks.
 
Political clashes also played a role in the lackluster flows experienced by US Equity Funds as investors waited to see what kind of deficit reduction package finally emerges from the three-way test of wills between President Barak Obama, Republican lawmakers and Democratic senators. Actively managed Small and Mid-Cap Funds managed to attract modest amounts of fresh money, but that was offset by net redemptions from Small and Large Cap ETFs during a week when some earnings and macroeconomic numbers suggested slower growth ahead.
 
Both of the major diversified developed markets fund groups posted modest inflows for the week. Global Equity Funds took in fresh money for the for the 13th time in the 15 weeks YTD while Pacific Equity Funds posted back-to-back weeks of inflows for the first time since early February.
 
Flows into EPFR Global-tracked Global Sector Funds also slowed sharply during the second week of April as investors adjusted their expectations in the face of higher energy prices and waited for earnings reports to provide additional guidance. Evidence that high oil prices are prompting US consumers to drive less and spend less was reflected in strong outflows from Energy Sector Funds, with redemptions from one major ETF playing a big role in their worst week since late 3Q08, and greatly reduced commitments to Commodity Sector Funds.
 
Higher interest rates, ongoing regulatory battles and the insurance bills for the earthquake and tsunami that hit Japan on March 11 kept the pressure on Financial Sector Funds, which experienced net redemptions for the fourth time in five weeks. But Real Estate Sector Funds posted solid inflows for the week that took the YTD total over the USD4.5 billion mark.
 
Flows in and out of the other major sector fund groups were modest, ranging from outflows of USD65 million to inflows of USD18 million. Healthcare/Biotechnology Sector Funds took in fresh money for the sixth time in the past seven weeks, making it their best period since mid-1Q10.

The usual suspects — fears about US municipal debt, hunger for yield, concerns about inflation and the Eurozone’s ongoing debt crisis — continued to drive flows into and out of EPFR Global-tracked Bond Funds during the week ending April 13. The combination of the ECB’s rate hike and Portugal’s request for aid took a toll on Europe and Global Bond Funds, with the former posting their biggest weekly outflow since late January and the latter seeing an 11 week inflow streak snapped, while outflows from funds specialising in municipal debt saw US Bond Funds post outflows for the first time in nine weeks.
 
Fund groups that offer some protection against inflation and dollar weakness continued to attract fresh money. Floating Rate Bond Funds extended their current inflow streak to 41 consecutive weeks, Emerging Markets Bond Funds posted their third straight week of inflows and High Yield Bond Funds saw YTD inflows climb to USD17.7 billion.
 
In the case of Emerging Markets Bond Funds, those funds with local and hard currency mandates took in similar amounts of fresh money – with retail investors net contributors for the fourth week in a row — that more than offset redemptions from blend funds.
 
US Municipal Bond Funds, meanwhile, have now surrendered over USD26 billion since the current outflow streak began in early November. This exodus has been driven by retail investors who are responsible for over 80% of the recent redemptions. The possibility that this asset class could lose its federal tax-exempt status as part of the latest push to tame the US deficit has trumped encouraging news about default rates and a sharp drop in new issuance.

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