For the first time since December 2008 a majority of the eight major EPFR Global-tracked equity fund groups boosted their cash allocations with increases ranging from 13 to 44 basis points.
The two exceptions were global emerging markets and EMEA equity funds, with the former dropping their average cash weighting to a 27-month low and the latter taking theirs down to its lowest level since Q2 1999. Both of the major bond fund groups increased their cash allocations.
After signs of a thaw in sentiment during the middle of the year, investors and fund managers soured on Japan again during early Q4 2009, with global ex-Japan equity funds cutting their average weighting to a more than seven year low and global equity funds taking it down to a level last seen in Q4 2002.
With the ability of Japanese companies to profit from the latest cyclical rebound by increasing their prices is being questioned in the face of an appreciating currency, increasingly aggressive Korean and Chinese competition for export markets, the return of domestic deflation and an uncertain policy environment at home as a new government drawn largely from the ranks of a party that had never held power until this year tries to find its feet.
In the case of global equity funds, developed Asia’s loss was emerging Asia’s gain, with further gains in Chinese and Taiwan allocations lifting the average emerging Asia and overall emerging markets weightings to their second record high in as many months. Global ex-US equity funds also lifted their emerging Asia allocation above eight per cent for the first time ever and boosted their exposure to Latin America to record setting levels.
Among the developed European markets, both of these fund groups rotated exposure from France and Italy to Switzerland and the UK, as did Europe equity funds. The latter currently have an average Emerging Europe allocation of 0.54 per cent, concentrated in Russia and Turkey, compared to 0.84 per cent for global funds and 1.56 per cent for global ex-US gunds.
A fair to good Q3 2009 earnings season and a desire to hedge against US dollar weakness kept the money flowing into emerging markets equity funds during October, with the BRICs markets (Brazil, Russia, India and China) the main beneficiaries when fund managers allocated this fresh money. EPFR Global-tracked funds committed USD2.8bn to Brazilian equities during October, contributing to a wave of fresh portfolio capital that prompted the country‚s government to introduce a new tax to try and stem the flow in order to preserve their currency‚s competitiveness, and also pumped between USD695m and USD880m into Russia, China and India.
As a result of these purchases, the average global emerging markets equity fund allocation for brazil climbed to a 17-month high and posted a new record among Latin America equity funds, Russia’s average GEM fund weighting jumped to a 12-month high and China allocations for Pacific equity funds exceeded 12 per cent for the first time since EPFR Global started tracking this fund group in Q4 1998.
Among the smaller markets net buying of Polish and Venezuelan equity during October jumped to levels last seen in Q3 2005 and Q1 2004 respectively, Latin America equity funds were net sellers of Colombia for the 16th straight month as the average allocation for this market slide to its lowest level since Q4 2007 and GEM equity funds were aggressive buyers of Malaysia a month after they took its weighting down to a ten-year low.
Korea and Taiwan remained the biggest GEM underweights going into November, with the magnitude climbing modestly to 222 and 228 basis points respectively, followed by Israel and Malaysia. Turkey was again the biggest overweight, followed in order by Thailand, Russia, Indonesia and Egypt.
With Q3 2009 earnings reports helping to shape their decisions, a majority of the eight major global, Europe and emerging market equity fund groups whose GICS Level I sector weightings data is tracked by EPFR Global increased their exposure to financials for the eighth consecutive month in October. The prospect of more consumer credit and the Christmas shopping season prompted seven of the eight fund groups to hike their consumer discretionary weightings and it was also a good month for energy, with all eight of the fund groups increasing their allocation for this sector ahead of the Northern Hemisphere’s heating season.
For the second month running the more defensive sectors generally saw their weightings slide. Seven of the eight fund groups cut their allocations for telecoms, while six of the eight cut their exposure to utilities and healthcare.
With dollar weakness taking centre stage as an investment theme going into November, all of the fund groups investing in emerging markets increased their Materials allocations as demand from US-based investors for both direct and indirect commodity exposure gathered pace. Materials regained their place as the biggest single sector allocation among Latin America equity funds and overtook information technology to claim third place among GEM equity funds.
At the end of October EMEA equity funds had the biggest exposure to energy and telecoms (28.75 per cent and 11.08 per cent), Asia ex-Japan equity funds to financials and information technology (35.56. per cent and 15.49 per cent), Latin America equity funds to materials and utilities (22.13 per cent and 5.43 per cent), Europe equity funds to industrials (13.36 per cent) and global equity funds to consumer staples and consumer discretionary (11.06 per cent and 11 per cent).
October saw both global and emerging markets bond funds post the biggest monthly inflows, in dollar terms, since EPFR Global started tracking these fund groups in Q1 1995. In the case of emerging market bond funds this cash found its way into some of the riskier markets, with their average allocations for Russia, Argentina and Venezuela all climbing during the month.
Argentina regained its position among the ten biggest country allocations for this fund group as the government signaled it will reopen negotiations with holdouts from the default settlement imposed in 2005 while net buying of Venezuela hit its highest level since Q1 2007. Emerging Europe’s average weighting jumped to a 14-month high as Russia supplanted Mexico as the second biggest country allocation going into December.
Global bond funds cut their exposure to the US and Germany by 243 basis points and 187 basis points respectively during October as they rebuilt their Australian and Japanese positions, lifted Italy’s average weighting to a 16-month high and increased their cash allocation for the third straight month. In contrast to their emerging markets counterparts, these funds reduced their weightings for all the major Latin American markets except Venezuela.
