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Emerging markets funds soak up more cash in early May, says EPFR

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Cash continued to bypass funds geared to developed markets in favour of emerging markets equity, high yield bond and some sector funds in the first week of May, according to EPFR Global

Cash continued to bypass funds geared to developed markets in favour of emerging markets equity, high yield bond and some sector funds in the first week of May, according to EPFR Global.

EPFR Global-tracked Asia ex-Japan, Latin America, EMEA and the diversified global emerging markets equity funds posted combined inflows of USD3.6bn and emerging markets bond funds recorded their best week since early 1Q08.

China remains a major driver of both sentiment and fund flows for the emerging markets asset class as its economy responds to aggressive lending by domestic banks. Through 6 May China equity funds had taken in fresh money eight of the past nine weeks and 29 of the past 30 trading days, including a year-to-date daily high of USD294m on 4 May.

During a week that also saw fears about the impact of swine flu and the results of the US banking system stress tests begin to ebb, EPFR Global-tracked equity funds recorded collective inflows of USD3.69bn. Excluding money market funds, which recorded outflows of USD1.57bn for the week, fixed income funds absorbed another USD2.67bn.

Although emerging markets funds generally fared better than ones invested in developed markets, there were exceptions. US bond funds maintained their record of absorbing fresh money every week year-to-date while flows into Global and Japan Equity Funds hit highs for 2009.

EPFR Global-tracked Asia ex-Japan equity funds posted the biggest inflows among the four major emerging markets equity fund groups for the second week running, taking in USD1.62bn compared to USD1.1bn for GEM equity funds, USD713m for Latin America equity funds and USD136m for EMEA equity funds.

Both EMEA and Latin America equity funds had their best week year-to-date, with renewed interest in Russia’s energy story and Turkey’s potential deal with the IMF driving the former fund group and strong flows into Brazil exchange-traded funds helping the latter.

Equity funds geared to China, Taiwan and Greater China accounted for two thirds of this week;s flows into Asia ex-Japan Equity Funds.

Japan equity funds finally attracted some positive interest in early May as housing and employment data from the US and manufacturing and loan figures from China rekindled some optimism towards the prospects for Japanese exporters. Manufacturing inventories are also dropping back towards pre-crisis levels. The USD164m these funds took in represents their best week since later September.

Hopes that a rise in pending house sales and a sharp decline in new jobless claims will help US consumers pick up where they left off last year, and relief that the results of stress tests on major American banks are not as bad as feared, had a modest impact on US equity funds. Although small cap funds absorbed a net USD1.1bn, that was more than offset by outflows from large and mid cap funds.

Europe equity funds also posted modest outflows ahead of a much anticipated 0.25 per cent cut by the European Central Bank that takes it key interest rate down to a new record low. There was some enthusiasm for funds geared to the UK, but that was not enough to offset redemptions from regional funds as rising unemployment depresses domestic consumption in key markets.

Both of the major diversified fund groups geared primarily to developed markets recorded inflows, with investors committing USD837m to global equity funds and USD25m to Pacific equity funds.

A string of better economic numbers in early May helped some sector fund groups post average portfolio eight to ten per cent gains for the week ending 6 May. But, by and large, investors were reluctant to chase those gains. EPFR Global-tracked financial sector funds, which gained over 12 per cent for the week, took in a modest USD69m for the week while energy sector funds (+9.54 per cent) absorbed USD54m and commodity sector funds (+8.6 per cent) USD151m. The latter fund group did extend its inflow streak to nine consecutive weeks, as did technology sector funds.

There was, however, a clear shift away from funds geared to sectors perceived as defensive. With the furor over swine flu losing some of its edge, healthcare/biotechnology sector funds posted outflows. So did utilities sector funds, which surrendered a net USD136m.

During the first week of May EPFR Global-tracked emerging markets bond funds posted a fourth straight week of inflows, their best run since mid-1Q08, as the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index dropped to its lowest level since early October and oil prices climbed to a six month high.
Global bond funds also took in fresh money for a fourth consecutive week, which represents their longest winning streak since a 15-week run that ended in early 3Q07.

US and high yield bond funds both extended their recent winning streaks. The latter took in a net USD724m, taking y-t-d inflows over the USD7bn mark, while US bond funds took in over USD1bn for eighth time in the past nine weeks.

Money market funds, which absorbed over USD420bn last year, have seen a net USD80bn pulled out since the second week of March.

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