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Equity fund flows reflect policy divergence

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Mutual fund flows during the second week of the New Year reflected the costs that investors anticipate from the course set by US monetary policymakers, who diverged further from their Japanese and European peers in mid-December when they hiked interest rates for the first time since 2Q06.

With a stronger dollar and higher capital costs adding to the pressure on corporate margins, investors pulled another USD12 billion out of EPFR Global-tracked US Equity Funds and a combined USD4.5 billion out US High Yield, Balanced, Bank Loan and Total Return Funds.
 
The search for safety amidst plunging equity indexes took investors to Japan Equity, US Bond and Money Market Funds during the week ending Jan. 13. Overall, Money Market Funds took in USD24 billion and Bond Funds a little over USD2 billion while Equity Funds posted collective outflows of more than USD11 billion.
 
Despite the support provided by the European Central Bank's quantitative easing (QE) program, which was expanded in late 4Q15, investors steered clear of both Europe Equity and Bond Funds. European exporters, a bright spot in recent years, are seen as especially vulnerable to weaker emerging markets demand and competition from Chinese rivals armed with a more competitive currency.
 
At the country level redemptions from Poland Equity Funds hit a 19 week high, China Equity Funds recorded their biggest inflow since mid-October and Spain Bond Funds posted back-to-back weekly inflows for only the second time in the past 11 months.
 
EPFR Global-tracked Emerging Markets Equity Funds posted outflows for the 11th straight week going into the second half of January as slumping commodities prices, fears of further US interest rate hikes and doubts that Chinese policymakers can maintain the stability of the renminbi that markets have become accustomed to took their toll.
 
Once again China Equity Funds were not among the casualties, with headline flows positive for the second week running on the back of renminbi-denominated institutional commitments to a handful of domestically domiciled ETFs. But flows for funds dedicated to Emerging Asia's other heavyweight, India, were negative for the eighth time in the past nine weeks with redemptions hitting a five week high ahead of the Reserve Bank of India's next policy meeting in early February. Recent lacklustre harvests have put pressure on rural incomes and food prices, complicating the job for Indian policymakers.
 
Redemptions from EMEA Equity Funds also picked up as low oil prices, the impact of recent terrorist attacks on tourism, and discomfort with political trends in Turkey, Poland and South Africa weighed on this fund group. With nationalist policies affecting financial plays and the energy sector hit by slumping oil prices EMEA Equity Fund managers are having trouble finding things to buy: the average cash allocation has jumped from 2.8 per cent in late 2Q15 to over 7 per cent.
 
Investors looking at Latin America favoured Mexico and its correlation with the still growing US economy over Brazil with its myriad of economic and political problems. Chile Equity Funds were hit by the latest drop in the price of copper, posting redemptions for the fifth time in the past six weeks.
 
Doubts about global growth and the ability of US companies to maintain profitability in the face of rising domestic interest rates helped to chase another USD8 billion out of EPFR Global-tracked Developed Markets Equity Funds during the week ending 13 January with US Equity Funds the major contributors to the headline number.
 
Large Cap US Equity Funds were again the hardest hit in cash terms while Mid Cap Funds saw the biggest redemptions in flows as a  per cent of AUM terms. Overall, flows clearly tilted away from funds managed for growth to funds managed for value.
 
Europe Equity Funds saw an inflow streak stretching back to the beginning of 4Q15 come to an end. Regional equity markets have been buffeted by the uncertainty surrounding emerging markets in general and China in particular, although the Eurozone's modest recovery continues to enjoy tailwinds in the shape of low energy prices and the ECB's accommodative policies. At the country level France Equity Funds extended their current inflow streak while redemptions from Spain Equity Funds hit a 23 week high.
 
Flows into Japan Equity Funds went largely to a small number of domestic ETFs while foreign domiciled funds saw net outflows. At its December meeting the Bank of Japan agreed to increase its commitments to ETFs in an effort to support Japanese equity markets in the face of fears about Chinese demand and the possibility of a regional currency war.
 
The largest of the diversified Developed Markets Equity Fund groups, Global Equity Funds, recorded another week of solid inflows that went largely to funds with ex-US mandates.
 
With the 4Q15 US corporate earnings season looming investors moved significant sums into and out of Sector Fund groups during the second week of January. They also recovered their appetite for gold, with dedicated Gold Funds attracting their biggest weekly inflow since the third week of 2015.
 
Overall, seven of the 11 major groups tracked by EPFR Global posted inflows for the week. Energy Sector Funds led the way with over USD1.5 billion committed. Flows into Energy Funds were broadly based, with 25 attracting at least USD10 million, as investors rewarded further moves by oil majors to cut costs through redundancies and reduced capital expenditures.?
 
While good for the bottom lines of energy plays, these reductions in capex spell more pain for Infrastructure Sector Funds which have not recorded a weekly inflow for three quarters and counting.
 
In terms of performance, Commodities Sector Funds have fared best in early 1Q16. The component of Commodities Sector Funds dedicated to gold and precious metals has benefited from renewed interest from investors unsettled by market volatility. Energy Sector Funds have turned in the worst performance numbers – down over 13 per cent — year-to-date.
 
The second week of January saw EPFR Global-tracked Bond Funds post consecutive weekly inflows for the first time since early November as investors sought the perceived safety of US investment grade debt. Flows into US Short and Long Term Government, Intermediate Term, Mortgage Backed and Municipal Bond Funds accounted for the bulk of the week's inflows, offsetting redemptions from most other fixed income fund groups.
 
The resilience of the US municipal bond market, which recently absorbed issues from Chicago and the state of Illinois after a year in which both Detroit and Puerto Rico cast long shadows over the asset class, continues to be supported by mutual fund investors. Since mid-September they have committed over USD8 billion to Municipal Bond Funds.
 
With investors in a risk averse mood redemptions from High Yield Bond Funds jumped to a four week high – US HY Funds accounted for two thirds of the headline number – and Emerging Markets Bond Funds extended their current outflow streak despite strong local support for Thailand and Colombia Bond Funds.
 
Investors continue to see limited value in European debt, redeeming money from Europe Bond Funds for the fifth time in the past six weeks while steering over USD9 billion into Europe Money Market Funds . They did make an exception for Spanish debt, which sold off ahead of December's general election and offers some value, with Spain Bond Funds absorbing fresh money for the second week running.

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