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Interest in EM funds soars as Fed signals rock bottom interest rates into 2014

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A week that ended with the Federal Reserve predicting rock-bottom US interest rates for another three years saw flows into EPFR Global-tracked Emerging Markets Equity and Bond Funds surge to levels last seen in Q2 2011 while Financial Sector Funds recorded their biggest weekly inflow since Q4 2010.

Investors also stepped up their search for yield, committing over USD2.5 billion to High Yield Bond Funds, and extended Europe Bond Funds longest inflow streak since a seven week run ended in early May, 2010.
Overall, EPFR Global-tracked Equity Funds absorbed a net USD8.62 billion during the week ending 25 January with Emerging Markets Equity Funds accounting for nearly half of that total. Bond Funds took in USD6.08 billion, their second highest weekly total since early Q3 2010, while Money Market Funds posted outflows of USD7 billion.

Reflecting the general increase in risk appetite, redemptions by retail investors from Equity Funds fell to their lowest level in over six months. There was also some interest in markets and regions that have not fared well in recent months, with commitments to India and Chile Equity Funds hitting their highest levels in over a year and Emerging Europe Equity Funds recording inflows for only the second time since mid-May.

Flows into EPFR Global-tracked Emerging Markets Equity Funds hit a 42 week high during the week ending 25 January, with retail investors committing the most money in over a year, as investors recovered their appetite for Asia’s story and factored in the monetary easing they now expect from the European Central Bank and the US Federal Reserve. Flows into Asia ex-Japan Equity Funds climbed to a 30 week high, YTD inflows for the diversified Global Emerging Markets (GEM) Equity Funds moved close to the USD6 billion mark and Latin America Equity Funds had their best week since Q4 2010.

In addition to growing faith in a "soft landing" for China’s economy, investors are responding to some big sell-offs last year and the general shift among emerging markets to more accommodative fiscal and monetary policy. India joined the ranks of major emerging market central banks that are easing monetary policy during a week when flows into India Equity Funds hit a 54 week high.


With Brazil’s central bank in rate cutting mode and China’s economic trajectory suggesting sustained demand for Latin America’s commodity exports, Brazil Equity Funds also enjoyed their biggest weekly inflow in over a year while the USD46 million absorbed by Chile Equity Funds was the most since late Q3 2010. Dedicated BRIC (Brazil, Russia, India and China) Equity Funds, meanwhile, posted back-to-back weeks of inflows for the first time since early April.

EMEA Equity Funds were again the exception to this trend, although Emerging Europe Regional Equity Funds did post modest inflows, as investors fretted about Russian politics and the continued exodus of domestic capital from the former superpower ahead of March’s presidential election. 


Tapping into US growth remained the most appealing option for developed markets investors during the fourth week of January, with US Equity Funds absorbing four out of every five dollars committed to EPFR Global-tracked Developed Markets Equity Funds.

Actively managed US Equity Funds attracted fresh money for only the sixth week since the start of H2 2011 as funds with a Growth style outperformed their Value counterparts. Flows into US-domiciled Alternative Funds also climbed to a 15 week high with Long/Short and Derivatives Funds the main money magnets.

There was no love once again for Europe Equity Funds, which posted outflows for the 11th time in the past 12 weeks against a backdrop that included the latest round of negotiations over Greek debt, fresh evidence growth in the region has stalled and a sharp reduction in the IMF’s forecast for 2012. Germany Equity Funds experienced net redemptions for the fourth week running, their longest losing streak since late Q1 2010, and outflows from UK Equity Funds jumped to a 24 week after data showing the country’s economy lost ground during the fourth quarter. 


Investors also pulled money out of Japan Equity Funds for the 12th time past 14 weeks as the world’s third largest economy posted its first annual trade deficit in three decades. That news highlighted some of the costs imposed on the country and its businesses by the idling of over 90% of Japan’s nuclear power plants in the aftermath of last year’s March 11 disasters.

For the third week running the two major diversified developed markets fund groups, Pacific and Global Equity Funds, recorded modest inflows.


After a week where four of the top five fund groups by performance suffered redemptions, commitments to the two groups showing the biggest gains during the week ending 25 January — Energy and Financial Sector Funds — hit 47 and 58 week highs respectively.

Other growth oriented fund groups did not respond to the Fed’s guidance on interest rates in such a positive fashion. Technology Sector Funds posted outflows for the sixth consecutive week despite a good earnings season for major US plays and investors pulled another USD345 million out of Commodities Sector Funds.  One of last year’s leaders when it came to attracting fresh money, Utilities Sector Funds, also had a rough week with outflows jumping to a level last seen in mid-Q3 2007.

Elsewhere, Healthcare/Biotechnology Sector Funds posted inflows for the fourth straight week, but slipped behind Energy and Financial Sector Funds in year-to-date terms.


Bond Funds extended their best start to any year since EPFR Global started tracking them as nearly all of the major fixed income fund groups attracted fresh money. YTD, Bond Funds have pulled in a net USD20.3 billion. The previous record at this stage of the year was USD17.4 billion in 2010, a year when total inflows exceeded USD354 million.



The more optimistic assessment of the Eurozone debt crisis that fuelled the previous weeks’ inflows faltered going into the final week of January as Greece argued with creditors over the terms needed to the next tranche of bailout money. Both Global and Europe Bond Funds saw inflows fall to a quarter — or less — of the previous week’s total, although the latter’s three week winning streak is the longest since a seven week run ending in early May, 2010.

EMEA Bond Funds were also affected, recording outflows for the fourth time in a row during a week when flows into all Emerging Markets Bond Funds hit a 24 week high and commitments to Local Currency Funds climbed to levels last seen in late August.


At the asset class level High Yield Bond Funds posted their biggest inflow in 12 weeks while Municipal and Mortgaged Backed Bond Funds extended inflow streaks that now stretch back to early September and early February of last year.

US Bond Funds extended their current inflow streak to 12 weeks and USD42.5 billion. Long and Intermediate Corporate Bond Funds again stood out in flows as a percentage of assets under management terms.

 

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