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Global and emerging market funds shine with dollar weakness

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Soaring gold prices and a slumping dollar prompted investors to step up the pace of their diversification strategies in early November.

EPFR Global-tracked emerging market equity funds, global equity, commodity sector, energy sector and global bond funds all posted strong inflows during the week ending 11 November.

Energy sector funds enjoyed their best week since early Q4 2008 and year-to-date flows into commodity sector funds are now just shy of USD12bn.

Despite the focus on the weakness of the dollar, flows into US equity funds hit a 47-week high as investors gravitated to stocks in light of recent earnings reports and expectations that domestic interest rates will stay at current levels well into next year.

US bond funds, meanwhile, continue to benefit from the belief among US-based investors that higher income tax rates are inevitable.

Overall, all equity funds absorbed a net USD10bn for the week while all bond funds took in USD5.58bn.

Redemptions from money market funds totalled USD7.1bn for the week, taking year-to-date outflows over the USD450bn mark.

In addition to being seen as a haven from dollar weakness, emerging markets benefited during the first full week of November from some robust Chinese macroeconomic data showing GDP growth on track to exceed ten per cent during Q4 2009. Flows into the diversified global emerging markets equity funds totalled USD1.48bn while Asia ex-Japan equity funds absorbed USD626m. Latin America equity funds and EMEA equity funds added an additional USD350m of combined inflows.

Not surprisingly, China equity funds stood out among the country fund groups investing in the BRIC (Brazil, Russia, India and China) markets, taking in a nine-week high USD256m, while flows into Brazil, India and Russia equity funds ranged from USD26m to USD87m. BRIC equity funds absorbed USD224m as they extended their current inflow streak to nine straight weeks.

Although bullish US earnings and GDP data remains at odds with employment trends and the official rationale for current interest rates, investors committed USD6.97bn to US equity funds during the week ending 11 November, their best showing since the second week of December 2008, with US large cap and US small cap blend ETFs accounting for the bulk of the inflows.

Although optimism about the US should be good news for Japanese exporters, investors had other things to chew on including a yen trading below 90 to the dollar and a surge in yields on Japanese debt that could put additional pressure on public finances. Japan equity funds posted outflows for the eighth straight week. But with only USD5.1bn of net outflows year to date, it may be cold comfort that Japan funds are on track for their best year for fund flows since 2006.

Flows into Europe equity funds rebounded from the previous week, but remained subdued as investors question how strong any recovery will be in 2010 given the competitive burdens created by strong regional currencies and the drag on domestic demand exerted by high unemployment levels. German business confidence has slid in recent weeks despite positive revisions to French forecasts for 2010 and other signs of regional improvement. Nevertheless, Europe equity funds are clinging on to year to date net inflows of USD923m. If they finish the year with positive flows, it will be for the first time since 2006.

Investors retained their appetite for diversified exposure to developed markets. Global equity funds took in another USD643m as they extended their current inflow streak to 17 weeks and USD16.6bn. Pacific equity funds, the other major diversified fund group, absorbed a modest USD15m. These funds have taken in USD1.8bn year to date.

Expectations that the current US commitment to low interest rates will be good for global growth and bad for the dollar boosted commodity prices and prompted investors to commit  USD1.41bn to commodity sector funds and energy sector funds during the week ending 11 November. The USD823 m absorbed by the latter was the biggest weekly total since the third week of September 2008, although subsequent data on US petroleum stockpiles gave investors pause for thought.

The prospect of low interest rates did allow investors to project stronger US consumption in the months ahead, with consumer goods sector funds absorbing USD167m for the week and technology sector funds USD91m. But it was not enough to completely repair the damage done to sentiment towards financial plays by the bankruptcies, recapitalizations and earnings announcements of the previous week. Financial sector funds surrendered USD292m for the week despite turning in the best performance, +7.1 per cent, of any sector fund group.

Regulatory concerns remain an issue for several sectors, with the possibility of having to cope with further curbs on greenhouse gases weighing on utilities sector funds and the debate over healthcare reform in the US doing healthcare/biotechnology sector funds few favours.

Bond funds and balanced funds enjoyed another week of strong inflows. Global bond funds saw YTD inflows climb north of USD25bn, which will make 2009 by far the best year for investor flows into these funds since EPFR Global began tracking their flows in 2004. These funds, which on average allocate a third of their portfolios to US debt, have now taken in fresh money for 31 straight weeks.

US bond funds absorbed over USD2bn for the 15th week in a row. Emerging markets and high yield bond funds rebounded from the previous week’s outflows and balanced funds took in fresh money for the 32nd consecutive week. Among US bond funds, the short term government bond funds and inflation protection funds accounting for only USD204m of the USD2.67bn taken in by this fund group as investors are following the Fed’s cue by showing little fear of inflation. US short term bond funds, investing in corporate and government issues, and municipal bond funds accounted for the biggest inflows.

Flows into emerging markets bond funds were evenly divided between funds investing in hard currency debt and those focused on local currency bonds as the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index continued to fluctuate around the 300 basis points level.

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