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Flows into equity funds stall as uncertainty builds

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With the summer holiday season winding down, investors have started to steer the cash they once again pulled out of money market funds into fixed income rather than equity funds, accord

With the summer holiday season winding down, investors have started to steer the cash they once again pulled out of money market funds into fixed income rather than equity funds, according to research by EPFR Global.

During the week ending 2 September, investors committed USD5.06bn to EPFR Global-tracked fixed income funds and pulled USD4.95bn out of equity funds.

In contrast to the previous week, when 21 of the 24 major EPFR Global-tracked equity, sector and fixed income fund groups posted inflows, only 12 managed to attract new money during the latest week.

US bond funds were by far the biggest money magnets, pulling in another USD3.1bn, while EMEA equity funds fared best among the major equity fund groups with inflows for the week of USD80m and funds investing in real estate stood out among the sector funds.

Fears of monetary tightening in China highlighted the dilemma facing investors during the next few months: reward markets that start to get their fiscal houses in order or get out of the way before waning stimulus spending triggers another dip in the global economy. Amidst the uncertainty, investors pulled USD713m out of the diversified global emerging markets equity funds and USD185m out of Latin America equity funds while committing USD80m and USD67m respectively to EMEA and Asia ex-Japan equity funds.

The flows into EMEA equity funds, which bright the year-to-date total within striking distance of positive territory, continue to be driven by a re-rating of central European markets and Turkey. While Russia equity funds attracted only USD9m for the week, Turkey equity funds absorbed a YTD high of USD53m and emerging Europe equity funds took in fresh money for the seventh straight week.

Despite concerns that Chinese authorities will tighten lending standards, thereby putting the brakes on the country’s economic growth, China equity funds took in another USD200m for the week. But Greater China and Taiwan equity funds both posted outflows. Elsewhere, Indonesia equity funds continue to benefit from reduced political uncertainty and expectations of a new, deeper round of reforms, taking in new money for the ninth straight week.

As expected, Japanese voters handed power to the Democratic Party of Japan at the end of August. It is the first time the 11-year-old party has secured enough support to form a government, and investors are now scrambling for clues about its economic policies and the degree to which it is willing to tackle Japan’s entrenched bureaucracy. But faith the new government will maintain expansionary fiscal policies helped EPFR Global-tracked Japan equity funds post modest inflows during the week ending 2 September.

In the US, the winding down of the popular ‘cash-for-clunkers’ programme prompted investors to think about the chances of further stimulus measures going into 2010, something that current employment trends argue for and public finances against. Investors pulled USD4.29bn out of US equity funds during the week, with large cap funds accounting for the bulk of the total redemptions. For the first time since the third week of July funds managed for growth outperformed their value counterparts across all capitalizations, albeit during a week when outperformed meant performed less badly.

With some key German programs nearing their end, life after stimulus spending was also a theme for investors focusing on developed European markets. Europe equity funds posted outflows of USD307m, thereby snapping a six week, USD2.27bn inflow streak.

Flows into the two major diversified fund groups investing primarily to developed markets diverged for the third straight week, with Pacific equity funds rebounding from their worst week YTD to post inflows of USD22m while global equity funds recorded net outflows of USD3m.

Weak employment numbers and the prospect of less government cash took the wind out of the sails of several major sector fund groups going into September. Real estate sector funds, still benefiting from the previous week’s better than expected US new home sales data, were the exception, taking in another USD187m and extending their current inflow streaks to seven weeks and USD1.6bn.

Doubts about Chinese demand weighed on energy and commodities sector funds, which surrendered USD130m and USD112m respectively, while questions about the impact of a tight labor market on US consumers were reflected in the USD119m pulled out of consumer goods sector funds and the USD112m redeemed from technology sctor funds. Healthcare/biotechnology sector funds also recorded outflows as the debate over major reforms to the US  system rumbles on. But utilities sector funds managed to attract fresh money for the fourth consecutive week.

Heading into September there was no let-up in the stream of cash flowing into EPFR Global-tracked fixed income funds. US bond funds took in over USD2bn for the fifth straight week as YTD inflows topped the USD48bn mark, balanced funds ran their current inflow streak to 22 weeks and USD6bn, high yield bond funds saw YTD inflows push north of USD17bn and global bond funds absorbed another USD955m.

Despite the undercurrent of rising risk aversion, which pushed the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index back up towards four per cent, emerging markets bond funds investing in riskier local currency debt again attracted the bulk of the new money – USD247m for the week – committed to this fund group. The share of flows going into short term and inflation protected US bond funds rebounded, climbing from under 20 per cent of total inflows the previous week to over 30 per cent.

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