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Fund flows reflect spike in risk aversion going into December

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Flows into emerging markets equity and the riskier bond fund groups lost momentum in early December as investors digested the implications of the moratorium being sought by Dubai World on its USD60bn debt pile.

For the week ending 2 December, EPFR Global-tracked high yield bond funds posted outflows for only the second time since late June while flows into emerging markets equity funds were around a third of their weekly average year-to-date.

The uncertainty and the accompanying market volatility heightened the already keen investor appetite for exposure to commodities and to the more conservative bond fund groups, with commodity sector, US and global bond funds all taking in over USD1bn in new money for the week.

Overall, bond funds collectively took in a net USD2.98bn for the week while their equity counterparts, helped by large inflows into some Europe equity exchange-traded funds, absorbed a net USD3.1bn.

Money market funds surrendered a modest USD838m as their current outflow streak hit eight consecutive weeks.

With the shock of Dubai World’s debt issues beginning to fade, commodities and currency issues reasserted themselves as major drivers of investor sentiment towards emerging markets in early December. The desire to hedge against dollar weakness by getting exposure to the commodities and growth stories in emerging markets helped EPFR Global tracked EMEA, Latin America and the diversified global emerging markets equity funds post inflows of USD33m, USD34m and USD687m respectively.

Asia ex-Japan equity funds, however, recorded outflows of USD306m for the week despite more strong macroeconomic data from their two BRICs markets, China and India. For this region, appreciating currencies raise questions about export competitiveness and increase the chances that governments will turn to capital controls.

The BRICs theme continues to play well, with dedicated BRIC equity funds posting their 12th consecutive week of inflows and China, Russia and Brazil equity funds all absorbing between USD110m and USD123m for the week.

Not surprisingly, investors pulled money out of Middle East regional equity funds for the sixth time in the past seven weeks while, with outflows hitting a 35-week high, as well as from Middle East and Africa regional equity funds.

For the third time this year EPFR Global-tracked Europe equity funds took in over USD2bn. Flows into the other major developed markets equity fund groups were not as eye-catching. Japan equity funds continue to suffer from perceptions that the country’s big companies are losing their pricing power due to a combination of domestic deflation, confused policymaking, a strong currency and fierce competition from regional rivals. Investors removed another USD271m from this fund group as its outflow streak hit 11 straight weeks.

US equity funds had an essentially neutral week, in flow terms, with safe-haven flows into large cap ETFs cancelled out by redemptions from small and mid cap funds. Recent macroeconomic data on housing and jobless claims has been mildly positive, and flows during the past week favored funds managed for growth over those with a value investment style.

Pacific equity funds, one of the two major diversified fund groups that invest primarily to developed markets, posted outflows for only the second time in the past 14 weeks as their big exposure to Japan deterred investors. But the other diversified fund group, global equity funds, took in fresh money for the 20th consecutive week as YTD inflows moved north of USD17bn.

EPFR Global-tracked commodity sector funds posted inflows of over USD1bn for the third straight week in early December as investors continued their search for cover from country risk, dollar weakness and market volatility, driving the price of gold over USD1,200 an ounce along the way. The USD1.13bn absorbed by this fund group took YTD inflows over USD24bn.

Elsewhere, the prospect of the Christmas shopping and the northern hemisphere heating seasons helped energy, utilities and consumer goods sector funds take in USD252m, USD121m and USD33m respectively for the week. Telecom sector funds had their best week since 2Q07 against a backdrop of good 3Q09 earnings, M&A activity and regulatory advances in Europe, while the more measured debate over healthcare reform in the US Senate helped healthcare/biotechnology sector funds record their first three-week inflow streak since September 2008.

Real estate and financial sector funds were among the fund groups recording outflows for the week as mixed data and questions about the impact of Dubai World on balance sheets weighed on both sectors.

Early December saw the more conservative EPFR Global-tracked bond funds maintain their record-setting absorption of new money as US bond funds took in over USD1bn for the 21st week in a row and global bond funds saw YTD inflows move within striking distance of USD30bn.

Emerging markets bond funds also posted inflows, although the USD229m they took in was only a third of their previously weekly average for 4Q09. Despite the concerns generated by Dubai World, however, emerging markets bond funds investing in local currency debt accounted for over two-thirds of all inflows into this fund group as the search for dollar hedges continued.

Balanced funds, which invest in both bonds and equities, posted outflows for the first time since late March as investors removed USD457m and redemptions from high yield bond funds hit a 38-week high of USD232m.

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