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Flows negative but returning as focus shifts in late March

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A sense that Japan is finally getting to grips with the situation at the Fukushima nuclear power plant and that the situation in the Middle East and North Africa is not getting any worse helped global equity markets rebound during the third week of March.

 

As the week progressed investors began to return, with seven of the nine major EPFR Global-tracked equity fund groups and all seven of the major fixed income groups posting inflows on March 23.    

This shift was not enough to cancel out the outflows that occurred earlier in the week as engineers were struggling to limit radiation leaks from the stricken Japanese plant and military enforcement of  the ‘no fly’ zone in Libya commenced. During the week ending March 23 EPFR Global-tracked Equity Funds posted collective outflows of USD7.68 billion, with Emerging Markets Equity Funds accounting for USD2.65 billion of that total, while Bond Funds took in a net USD1.86 billion.
 
Going into the final week of 1Q11 it was the headwinds facing Europe that appeared to be getting the most attention. Europe and Emerging Europe Equity Funds both experienced above average redemptions during a week when Portugal’s government collapsed while Europe Bond Funds recorded outflows for the 23rd time in the past 24 weeks.  

Year-to-date redemptions from Emerging Markets Equity Funds pushed over the USD26 billion mark during the week ending March 23, making it the worst start to a year for this fund group in dollar terms since EPFR Global started tracking them during 1Q95. Investors are apparently wondering how the combination of higher energy prices, appreciating currencies and rising inflation will affect the growth prospects, policy choices and investment climates of these markets.  

China and its eye-popping growth rate remains a focal point for these concerns, with the country’s central bank raising bank reserve requirements for the sixth time since the beginning of 4Q10 in an effort to contain an inflation rate pushing towards 5%. China Equity Funds recorded outflows for the 10th time in the 12 weeks YTD, although flows into Greater China Equity Funds hit an 11-week high on hopes that efforts to rebalanced Chinese growth towards domestic consumption will mean more opportunities for Taiwan and Hong Kong-based companies.  

Another BRIC market, India, is also trying to keep the lid on inflation without choking off its strong growth. Concern that the country’s central bank is still playing catch-up with prices contributed to the seventh week of outflows posted by India Equity Funds during the past 10 weeks.  

Russia Equity Funds, however, continued their strong start to the year as investors sought exposure to its non-OPEC energy story. YTD inflows have now surpassed USD3 billion. But another EMEA sub-group, Emerging Europe Equity Funds, are coming under pressure as investors worry that the Eurozone’s debt crisis will result in further austerity measures and squeezes on bank credit. Over USD300 million has been redeemed from this fund group since the beginning of March.  

Latin America Equity Funds posted their 10th straight week of outflows as leaders throughout the region wrestle with inflationary pressures that have triggered policy responses ranging from fining the providers of independent estimates, in the case of Argentina, to Brazil’s 300 basis points worth of rate hikes since 2Q10.  

EPFR Global-tracked Developed Markets Equity Funds posted back-to-back weeks of outflows for the first time since August as the aftermath of the March 11 earthquake that hit Japan, concerns about the Eurozone and mixed US data kept investors on edge.  

For the second week running Japan Equity Funds posted inflows as large redemptions from actively managed funds were offset by big flows into a few exchange traded funds.  "The buying of ETF shares for shorting purposes and asset purchases by the Bank of Japan are two of the possibilities for the previous week’s counter-intuitive flow numbers, while this week investors appeared to be buying the dip in Japanese equities,"observed EPFR Global Managing Director Brad Durham.  

Flow data for Europe Equity Funds also mirrored the previous week, with both Europe and Europe ex-UK Regional Funds seeing over USD800 million pulled out during the week while dedicated Germany and France Equity Funds posted solid outflows. The collapse of Portugal’s government, expectations of an interest rate hike by the European Central Bank in April and a new round of bank ‘stress tests’ have challenged earlier assumptions about the region’s growth during 2011.  

Expectations for the US economy are also under pressure from mixed housing, earnings, employment and capital goods data and the fact that the US Federal Reserve is due to wrap up its second quantitative easing program – the so called QE2 – in June. US Equity Funds posted their second straight week of outflows, with retail investors pulling money out for the fourth week in a row, as funds with a Value style outperformed their Growth counterparts across all capitalizations. Investors looking for North American exposure turned their attention northward, with Canada Equity Funds posting their biggest weekly inflow on record.  

Global Equity Funds recorded inflows for the 11th time in the 12 weeks YTD inflows pushed over the USD18 billion mark. The other major diversified developed markets fund group, Pacific Equity Funds, posted their largest weekly outflow since 1Q08.  

Commodity Sector Funds moved to the fore among EPFR Global-tracked sector funds during the third week of March, absorbing over USD1 billion for the fifth time in the past seven weeks as YTD inflows moved past the USD8 billion mark. Despite the general uncertainty funds specialising in gold and other precious metals accounted for less than a fifth of the week’s total inflow.  

The other two sector fund groups to see fresh money during the week ending March 23 were Energy and Real Estate Sector Funds. The former, which have already eclipsed the full year inflow record set in 2005, benefited from analysis suggesting that Japan, as it recovers from the earthquake and subsequent tsunami, will need to import even more energy to offset the generating and refining capacity lost in the disaster.  

Technology Sector Funds, which carried a 13 week inflow streak into March, posted their biggest weekly outflow since mid-2Q10 as weaker US private capital spending and supply chain fears weighed on investor sentiment. Consumer Goods, Healthcare/Biotechnology, Financials, Utilities and Telecom Sector Funds all experienced net redemptions for the week ranging from USD118 million to USD687 million.  

With events in Portugal keeping the Eurozone debt crisis in sharp focus, prices rising in almost every corner of the world and the end of the QE2 program on the horizon, fixed income investors again opted for fund groups perceived as conservative during the third week of March. US Bond Funds and Global Bond Funds posted solid inflows, as did Balanced Funds, while Europe, High Yield and Emerging Markets Bond Funds posted outflows.  

The second consecutive week of outflows from High Yield Bond Funds, their first since late 2Q10, pulled YTD inflows back below the USD15 billion mark. Lower risk appetite, questions about the quality of recent issues and fears that returns have peaked are among the recent headwinds that have stalled this fund group’s blistering start to the year.  

For Europe Bond Funds the usual suspect – the Eurozone debt crisis – is keeping the pressure on. Retail investors continue to bail out of this fund group, and have shown little inclination to chase returns when this asset class has rallied. They have opted instead for Global Bond Funds, which allocate more than a third of the average portfolio to Developed Europe: the nine week inflow streak these funds carried into the final week of 1Q11 has been underpinned by 12 straight weeks of fresh commitments from retail investors.  
 
Flows into US Bond Funds during the week were broadly based, with investors showing some interest in sub-groups they have recently shunned. Although US Municipal Bond Funds posted outflows for the 19th consecutive week the pace of redemptions slowed, with funds reporting daily recording only their second inflow YTD on March 23, and Intermediate Bond Funds extended their longest inflow streak since November.  

Emerging Market Bond Funds continued their choppy ride as outflows from Local and Blend Currency Funds swamped flows into Hard Currency Funds as investors continue to juggle their portfolios to reflect the impact of rising oil prices, higher interest rates and the new political realities in the Middle East and Africa region.  
 

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