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German equity, gold and EM bond funds take safe haven mantle as investors flee money market funds

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With US policymakers fiddling in the face of a possible default, European sovereign ratings continuing to drift south and China For many, German assets appear to be the best option. EPFR Global-tracked Germany Equity Funds attracted over USD3 billion during the week ending 27 July, taking year-to-date flows into these funds over the USD15 billion mark compared to USD5.5 billion for US Equity Funds, USD4 billion for Japan Equity Funds, USD3 billion for Russia Equity Funds and USD2 billion for Canada Equity Funds.

 

Funds investing in emerging markets debt also extended their current inflow streak to 18 consecutive weeks and Commodity Sector Funds specializing in gold and precious metals took in over USD1 billion for the third week running.

Overall, EPFR Global-tracked Bond Funds took in a net USD1.99 billion for the week while Equity Funds collectively absorbed USD1.31 billion — of which Emerging Markets Equity Funds accounted for USD275 million — and Money Market Funds surrendered over USD37 billion.

During the fourth week of July EPFR Global-tracked Emerging Markets Equity Funds rebounded from their worst week since mid-May to post modest inflows, with the diversified Global Emerging Markets (GEM) Equity Funds accounting for the bulk of the fresh money. Flows into and out of the three major regional emerging markets fund groups were again tepid, with Latin America Equity Funds snapping their six week outflow streak while Asia ex-Japan and EMEA Equity Funds recorded outflows of USD58 and USD54 million respectively.
 
Uncertainty about the impact on the Chinese economy of tighter domestic credit, the possible downgrading of its single biggest debtor — the US — and efforts to rein in the countryChina Equity Funds post another week of outflows despite recent data showing 1H11 GDP growth exceeding 9%. India Equity Funds also remain under pressure, posting outflows for the 12th time in the past 13 weeks as the country

Latin America Equity Funds benefited from renewed interest in Brazil and Mexico. In the case of the former, interest rates are seen as close to peaking and some investors are penciling in a cautious reform story. Mexico Equity Funds, meanwhile, enjoyed their best week since early 2Q10 as investors anticipated an increase in the amount of public pension money that can be allocated to equities.

The redemptions from EMEA Equity Funds extended their current outflow streak to 12 consecutive weeks, their worst run since 4Q08, as redemptions from Africa Regional Funds hit a 23 week high thanks to strike action in South AfricaEmerging Europe Funds, coming off their worst week in over two and a half years, posted their smallest outflow since early May.
 
With US lawmakers going in circles over the federal debt ceiling and ratings agencies continuing to downgrade peripheral Eurozone markets, developed markets investors again gravitated to Germany and Japan Equity Funds during the week ending July 27. Flows into the former hit their highest weekly level since mid-2Q08 while the latter saw YTD inflows move past the USD4 billion level.

The flows into dedicated Germany Exchange Traded Funds helped Europe Equity Funds post their biggest inflow in 63 weeks despite the toll the ongoing Eurozone debt crisis is taking on regional confidence and growth. France Equity Funds also benefited from the flight to quality within the region, enjoying their best week since early 4Q08.

Japan Equity Funds took in fresh money for a fifth straight week ahead of a second quarter earnings season that is slated to generate better than expected results and encouraging guidance for the second half of the year. A supplemental budget for earthquake and tsunami reconstruction work, one of the preconditions set by lame-duck Prime Minister Naoto Kan for stepping down, has also passed.

On the other side of the Pacific retail investors pulled money out of US Equity Funds for the 14th time in the past 15 weeks as the political stalemate over the debt ceiling continues to threaten the countryLarge Cap ETFs offset redemptions from Small Cap ETFs.

Global Equity Funds, which on average allocate over a third of their portfolios to the US, posted their biggest outflow in nine weeks. Pacific Equity Funds, the other major diversified developed markets fund group, extended their current losing run to three straight weeks.

Enthusiasm for gold and precious metal underpinned another week of solid flows into Commodities Sector Funds in late July as investors continued to look for alternatives to US and Eurozone debt. It was also the only one of the nine major sector fund groups tracked by EPFR Global to post positive performance numbers during the week ending July 27.

Healthcare/Biotechnology Sector Funds turned in the worst performance as fears about public reimbursement rates, especially if the US Treasury is forced to resort to extraordinary measures to meet its obligations, took their toll. Redemptions from this fund group climbed to a nine week high. The prospect of higher US sovereign borrowing costs, and the effect that could have on mortgage rates, also hit Real Estate Sector Funds which experienced their second worst week YTD.

A rebound in commitments by institutional investors helped Financial Sector Funds shrug off a mixed second quarter earnings season and continued uncertainty about the effect the Eurozone debt crisis will have on Tier 1 capital reserves. But the lack of enthusiasm shown by institutional investors since early June for Technology Sector Funds saw that fund group post outflows for the 11th time in 13 weeks.

YTD, Commodity and Real Estate Sector Funds have attracted the most new money while Financial Sector Funds have seen the biggest net redemptions.

Investors kept their distance from EPFR Global-tracked US and Europe Bond Funds going into the final days of July but remained hungry for yield. Flows into High Yield Bond Funds hit a 12 week high and Emerging Markets Bond Funds posted inflows for the 18th straight week

Inflation continued to slip down the list of concerns, with Inflation Protection Bond Funds posting back-to-back weeks of outflows for the first time since December and Floating Rate Bond Funds snapping an inflow streak that stretched back to late May, 2010.

Europe Bond Funds endured another tough week that saw YTD outflows break the USD18 billion mark as Greek sovereign debt was downgraded further into "junk" territory and Italian debt yields came under fresh pressure. The last time retail investors committed money to this fund group in mid-December. Flows into US Bond Funds, meanwhile, favoured funds with short term mandates — maturities of under five years — at the expense of most other sub-groups.

Investor commitments to Emerging Markets Bond Funds have shifted back in favour those with local currency mandates. YTD those have accounted for three-quarters of the nearly USD18 billion absorbed by all EM Bond Funds.

Balanced Funds, which invest in both bonds and equities, posted modest inflows that took the YTD total back within striking distance of the USD14 billion level.

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