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Fund flows show modest rebound in risk appetite

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The second week of October saw mutual investors cautiously emerge from their shells. Preliminary data for the week ending 14 October shows EPFR Global-tracked High Yield Bond Funds on track for their biggest inflow since early April, Balanced and Emerging Markets Equity Funds set to end their longest outflow streaks since 4Q11 and 1Q14 respectively and flows into China Equity Funds hitting a 14 week high.

This improvement in risk appetite owes much to the perception that recent lackluster economic data from around the globe will stay the US Federal Reserve's hand when it comes to hiking interest rates and prompt other central banks to boost or extend the accommodative measures they have taken.
 
Initial numbers for the week 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, show net collective inflows of around USD4 billion for both Equity and Bond Funds while Money Market Funds absorbed a little over USD5 billion. Dividend Equity Funds, however, extended their longest outflow streak since a 30 week run ended in 1Q08.
 
Helped by the slow but steady thawing of sentiment towards China, EPFR Global-tracked Emerging Markets Equity Funds look set to snap their 13 week outflow steak going into the second half of October. The week ending 14 October also saw EMEA Equity Funds extend their longest run of inflows since 1Q12 and Latin America Equity Funds take in fresh money for only the second time in the past 13 weeks.
 
Although the recent run out outflows from Emerging Markets Equity Funds has arguably pushed into excess territory, and is hence sending a contrarian 'buy' signal, it is the more benign interpretation of China's growth trajectory that is having the biggest impact on flows. Although recent macroeconomic numbers suggest that economic growth in China is still slowing, more investors are focusing on the improving quality of that growth and the fact measures implemented to support it in 1H15 are likely to have an increasing impact. Daily data shows that both foreign and domestic currency flows into China Equity Funds have turned positive since the beginning of October.
 
This shift in perceptions has given EMEA and Latin America resource producers a new shine. Brazil Equity Funds have now posted inflows three of the past five weeks despite political gridlock and an economy producing more inflation than growth. Russia Equity Funds have taken in fresh money for four straight weeks, further helped by signs that Russia's policymakers are looking beyond the energy sector to boost the economy.
 
Also benefiting are Frontier Markets Funds, which have stumbled this year as fears about Chinese growth and tighter monetary policy took their toll. These funds snapped an eight week outflow streak as flows into Vietnam Equity Funds hit their highest level since early July.
 
Japan Equity Funds continued to struggle during the second week of October as investors showed a marked preference for the fresher quantitative easing story offered by Europe Equity Funds. Overall, flows into EPFR Global-tracked Developed Markets Equity Funds hit a four week high as waning expectations of an October rate hike helped US Equity Funds snap a three week outflow streak.
 
The latest Japan Equity Fund redemptions were more broadly based than the previous week, with 40 per cent of the funds tracked recording outflows, 27 per cent reporting inflows and the rest seeing nothing either way. Japan's government recently downgraded its outlook for the economy as corporate inventories build up, businesses keep the lid on investment and domestic consumers remain cautious.
 
Year-to-date Japan Equity Funds have slipped behind Europe Equity Funds as the best performers among the major Developed Markets Equity Fund groups. Flows into Europe Equity Funds are being supported by domestic investors, with over 80 per cent of the latest inflows denominated in European currencies, and the fund group has attracted retail support 11 of the past 14 weeks.
 
Retail investors continue to steer clear of US Equity Funds, having redeemed money 40 of the 41 weeks YTD. But institutional commitments helped US Equity Funds overall post inflows with Large Cap Blend ETFs attracting the biggest commitments and Large Cap Growth ETFs turning in the best performance.
 
During a week when metals bellwether Alcoa kicked off the 3Q15 US corporate earnings season by undershooting expectations and retail major Walmart issued a profit warning for 2016 flows into EPFR Global-tracked Industrial Sector Funds hit their highest level since mid-2Q13 while commitments to Consumer Goods Sector Funds exceeded USD800 million. Mutual fund investors also snapped Energy Sector Funds' modest inflow streak and continued pulling back from both Healthcare/Biotechnology and Financial Sector Funds.
 
The bulk of the week's flows into Industrial Sector Funds went into ones with dedicated US mandates. Analysis by one major ETF provider indicates that those dedicated to industrials top the rankings when it comes to short interest – and that percentage has risen recently – while Telecoms and Technology ETFs rank lowest.
 
Telecoms Sector Funds, which are tied to the sector expected to turn in the best average third quarter earnings growth, have attracted more interest and money with daily data showing inflows five of the past seven days.
 
Redemptions from Energy Sector Funds, meanwhile, were broadly based. The sector has been battered by a price war triggered by the squeeze the US shale industry has put on Saudi Arabia and other major producers. It is now under additional pressure from slowing global growth an the effect that may have on demand.
 
Flows into EPFR Global-tracked Bond Funds during the second week of October hit their highest level since mid-July as money returned to US High Yield Bond Funds, Emerging Markets Bond Funds snapped their 11 week outflow streak and Global Bond Funds took in fresh money for the first time since the third week of August despite retail investors extending a redemption streak that stretches back to mid-April.
 
YTD fixed income funds domiciled in the US have attracted the biggest inflows. After a strong start to 2015 those domiciled in Europe have suffered significant redemptions while those based in Japan experienced consistent outflows.
 
As has been the case with their equity fund peers, Global Bond Funds with ex-US mandates have fared better than their fully global counterparts this year with the latter accounting for the bulk of the more than USD12 billion that has flowed out over the past two months.
 
Among Emerging Markets Equity Funds those with local currency mandates saw the biggest inflows, with some investors now expecting a rebound in emerging markets currencies if the Federal Reserve keeps US interest rates on hold at its policy meeting later this month.
 
Europe High Yield Bond Funds accounted for the biggest share of the modest overall flows into all Europe Bond Funds with Norway Bond Funds the biggest contributors at the country level.
 
Flows into US Bond Funds were also driven by commitments to High Yield Bond Funds, with Corporate Bond Funds of all durations also recording solid inflows.
 
The two major multi-asset fund groups enjoyed better weeks, with Balanced Funds snapping a lengthy outflow streak and Total Return Bond Funds on track to post inflows for only the third time in the past 18 weeks.
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