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Flows quickly slip back into established pattern following Fed decision not to raise rates

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Although there was an appreciable slowing of the outflows from Emerging Markets Equity and Bond Funds in the wake of the US Federal Reserve's decision to keep interest rates on hold, the week following the Fed's September meeting saw the general quantitative easing-centric pattern of flows year-to-date reassert itself with Europe, Global ex-US and Japan Equity Funds seeing the biggest commitments while over USD7 billion flowed out of US Equity Funds.

Preliminary numbers for the week ending 23 September based on combined daily and intraday data, which have a more than 85 per cent correlation with the weekly numbers that will appear later today, indicate that EPFR Global-tracked Equity Funds posted collective net outflows of over USD3 billion while flows for Bond Funds were essentially neutral and Money Market Funds took in around USD14 billion. Dividend Equity Funds extended an outflow streak stretching back to mid-July.
 
At the country level, daily data showed flows to Germany Equity Funds falling off at week's end as the ripples from the Volkswagen emissions scandal spread. China Equity Funds are on track to snap a 10 week outflow streak, Thailand Bond Funds had another strong week and Russia Equity Funds recorded their biggest weekly inflow since mid-April.
 
With a first hike in US interest rates now off the table until late October, when the Fed meets again, the pressure on EPFR Global-tracked Emerging Markets Equity Funds eased appreciably during the third week of September. Ahead of the final weekly numbers three of the four major EM groups look set to record inflows, with the diversified Global Emerging Markets (GEM) Equity Funds posting their first inflow in just under three months.
 
While one of the clouds dogging emerging markets lifted, albeit temporarily, several others remained firmly in place. One of these is the trajectory of China's economy. More weak manufacturing data reinforced fears that the current slowdown in world's second largest economy may be deeper and longer than previously expected. As a result Asia ex-Japan Regional and Greater China Funds experienced further redemptions, but the assumption that this data will prompt Chinese policymakers to step up their efforts to stimulate the economy helped China Equity Funds post modest inflows for the first time since early July.
 
The prospect of more Chinese stimulus measures also helped Brazil Equity Funds offset the headwinds generated by their country's ragged economic performance, political problems and recent ratings downgrades. The bulk of the latest inflows into Brazil Equity Funds have been US dollar denominated: real-denominated flows have been negative since late July.
 
Another group cutting their support for Brazil are the managers of GEM Equity Funds. The latest allocations data shows their average weighting for Brazil is close to dropping below the 7 per cent level for the first time since 2Q03. But GEM allocations for another troubled BRIC market, Russia, continue to rebound from the 14-year low they touched in 1Q15, hitting an 11 month high coming into September.
 
It was business as usual for EPFR Global-tracked Developed Markets Equity Funds during the week ending Sept. 23, with Europe, Japan and Global ex-US Equity Funds adding to their already impressive YTD inflow tallies while outflows from US Equity Funds resumed after a two week hiatus.
 
Europe Equity Funds, which have now absorbed over USD100 billion so far this year, are benefiting from the combination of the European Central Bank's quantitative easing (QE )program, signs of stronger growth and an unexpectedly clear result from Greece's latest election. As a result of the QE program Europe Equity Fund allocations to the banking sector have soared, hitting their highest level since 4Q09 at the end of August. But a rebound in allocations to automotive stocks seems likely to be reversed by the scandal engulfing German carmaker Volkswagen.
 
Japan Equity Funds chalked up another week of inflows that were once again predominately yen-denominated and concentrated in a handful of domestically domiciled ETFs. Retail support has ebbed in recent weeks and looks set to be negative for only the second time since early June.
 
Passively managed funds with large cap mandates accounted for the bulk of the week's redemptions from US Equity Funds. There was some investor interest in actively managed Small Cap Growth and Mid Cap Value Funds.
 
The third week of September was a better one for Sector Funds, with seven of the 11 major groups tracked by EPFR Global recording inflows that ranged from around USD450 million for Consumer Goods Sector Funds to around USD100 million for Commodities Sector Funds.
 
With a hike in US interest rates postponed yet again Utilities Sector Funds snapped a four week outflow streak and Technology Sector Funds posted inflows for only the second time since the final week of July.
 
The lack of action by the Fed left mutual fund investors free to focus on other drivers such as government policy and the impending 3Q15 earnings season. In the former camp, US presidential candidate Hillary Clinton's campaign proposals to limit "profiteering" by pharmaceutical companies put pressure on Healthcare/Biotechnology Sector Funds which recorded outflows for the third time in the past five weeks. Redemptions from pure Biotechnology Funds accounted for the bulk of the week's outflows.
 
Looking ahead, the market is forecasting another bad earning quarter for energy and commodities companies and US firms whose income relies of exports. Telecoms and financial plays are expected to turn in some of the better earnings numbers.
 
Redemptions from Emerging Markets Bond Funds fell to an eight week low in the days following the Fed's September meeting and Municipal Bond Funds are on track for their second biggest inflow YTD as mutual fund investors digest the US central bank's decision not to hike interest rates. However, g iven the Fed policymakers will revisit the issue at a two day meeting ending October 28 the overall response was muted. Investors continue to pull back from fund groups with multi-asset and global mandates and to favour funds tied to investment grade debt over those specialising in riskier asset classes.
 
Among the reason that High Yield Bond Funds did not rebound more aggressively are the rising number of defaults by energy issuers squeezed by low oil prices and the allocations issues posed by the recent influx of previously investment grade debt from companies such as Brazil's Petrobras that has been downgraded.
 
With Greece's election out of the way, daily data showed flows for Europe Bond Funds turning positive as the week progressed. They are still likely to post a fifth straight week of net inflows, but some investors and fund managers are also beginning to pencil in more easing by the ECB if the fallout from China's slowing economy is greater than expected.
 
Local Currency Emerging Markets Bond Funds were the main beneficiaries of the Fed's decision among the EM sub-groups. They were also helped by another strong week for Thailand Bond Funds as local investors looked for alternatives to bank deposits that are no longer covered by government guarantees.
 
Investors focused on the US continue to rotate from Intermediate Term US Bond Funds to investment grade fund groups with short and long term mandates. Mortgage Backed Bond Funds took in fresh money for the eighth consecutive week and 37th time in the 38 weeks YTD as investors respond to the higher yields offered by an asset class they view as tightly regulated compared to 2006-08.

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