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Investors hit pause button in mid-November as central bank meetings loom

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With the signals from the 3Q15 corporate earnings season fading, France reeling from a major terrorist attack, three of the world's major central banks scheduled to meet during the first half December and Spain due to hold a general election later that month, there was no shortage of reasons for mutual fund investors to take a step back in mid-November.

Many did. Most EPFR Global-tracked fund groups saw flat or negative flows during the week ending November 18. Overall, both Bond and Equity Funds posted modest collective outflows around the USD2.5 billion mark while Money Market Funds – a cash equivalent – took in over USD15 million.
 
While the week's data suggests some 'safe haven' activity following the attack on Paris, expectations for monetary policy remains the biggest driver of flows. Despite events in France, Greece's ongoing fiscal troubles and the risk that Spain's election will throw up another anti-austerity coalition, the perception that the European Central Bank (ECB) is the most likely member of the 'big three' to expand monetary easing this year kept the money flowing into Europe Equity Funds.
 
At the country and asset class level both Dividend Equity and High Yield Bond Funds experienced net redemptions for the second week running, outflows from France and Greece Equity Funds hit 20 week and year-to-date highs respectively and China Bond Funds snapped a lengthy outflow streak.
 
Outflows from EPFR Global-tracked Emerging Markets Equity Funds accelerated to a 10 week high, with retail redemptions hitting levels last seen in late August, as the prospect of the first US interest rate hike since 2006, weak commodity prices and uncertainty about China's economy kept the pressure on this asset class. Frontier Markets Funds had a particularly rough week, recording their biggest outflow since mid-3Q11.
 
Swimming against this tide were Latin America Equity Funds which, in spite of the region's reliance on commodities exports, recorded consecutive weekly inflows for the first time since early July. The prospect of electoral change in Argentina and Venezuela, Brazil's reluctant shift towards more orthodox economic policymaking and Mexico's correlation to the US economy have prompted some investors to reassess the region's longer term outlook.
 
Emerging Asian markets, meanwhile, continue to feel the squeeze from weaker Chinese demand and fears that corporate earnings will be hit in the coming year by the higher cost in local currency terms of servicing USUSD-denominated debt. China Equity Funds posted their third straight week of outflows as both foreign and domestic investors pulled back. YTD local currency redemptions are now around 60% of their mid-June peak.
 
Flows for EMEA Equity Funds were negative for the third week running as redemptions from Russia Equity Funds hit an 11 week high. Russia's economy lost ground between July and September for the third consecutive quarter while the inflation rate remained in double digits and defense claimed a growing share of the country's budget.
 
A consensus that December will see the Eurozone's central bank implement additional easing measures while the Bank of Japan keeps policy unchanged and the US Federal Reserve hikes rates for the first time in over nine years was reflected in the flows recorded by EPFR Global-tracked Developed Markets Equity Funds during the week ending November 18. Europe Equity Funds recorded solid inflows, flows for Japan Equity Funds were essentially neutral and US Equity Funds posted modest outflows.
 
In the case of Europe Equity Funds, investors took a generally positive view of the region but pulled back from fund groups dedicated to markets with real or potential issues. In the wake of the Nov. 13 terrorist attacks in Paris redemptions from France Equity Funds hit their highest level in over four months while Spain Equity Funds posted outflows for the fourth time in the past five weeks as the clock counts down to elections late next month.
 
Japan Equity Funds chalked up their second straight week of outflows during a week that ended with the Bank of Japan declining to boost its current quantitative easing program. Since the beginning of November yen-denominated flows have been negative while foreign currency flows have regained some of the momentum they lost in August.
 
US Mid Cap Equity Funds enjoyed their biggest inflow since mid-September and Large Cap Growth Funds absorbed over USD1 billion, but that was not enough to prevent US Equity Funds overall from posting modest outflows for the third week in a row.
 
Global Equity Funds, the largest of the diversified Developed Markets Equity Fund groups, also struggled to attract fresh money with commitments to Global ex-US Funds narrowly offsetting redemptions from funds with fully global mandates. The previous week this fund group posted a new record for inflows, taking in over USD4 billion.
 
Despite oil prices ranging around USD40 a barrel investors pumped another USD980 million into EPFR Global-tracked Energy Sector Funds during the third week of November. The stepped up war against ISIL in the Middle East and cost cutting by energy majors suggests to some investors that oil prices will move higher in the coming months and that reorganised energy companies will be very profitable when that happens.
 
Energy Sector Funds were one of six among the 11 major Sector Fund groups tracked by EPFR Global to record inflows. Financial, Consumer Goods and Technology Sector Funds also took in fresh money as investors continue to translate stronger macroeconomic data from the US into higher consumption and demand for consumer credit as well as a modest hike in interest rates.
 
Commodities Sector Funds saw a three week outflow streak come to an end, in part because of the renewed interest in Gold Funds stemming from the Paris attack.
 
Most of the major defensive fund groups struggled, with Healthcare, Utilities, Telecom and Infrastructure Sector Funds all seeing money flow out. Infrastructure Sector Funds have not recorded an inflow since the final week of March.
 
Fixed income investors continued to keep their distance from the riskier EPFR Global-tracked Bond Fund groups during the third week of November as they waited to see which way the interest rate and political winds will blow in the US and Europe. High Yield and Europe Bond Funds look set to post back-to-back weekly outflows for the first time since early October, Emerging Markets Bond Funds recorded outflows  for the fifth week running and Bank Loan Funds experienced net redemptions for the 15th time in the past 16 weeks.
 
With France responding to the Nov. 13 terrorist attack by renouncing deficit targets in order to increase security spending, Spanish election polls suggesting the country could go into 2016 with a weak coalition government struggling to contain Catalan secessionists and Greece's finances as parlous as ever, investors are viewing European debt with some caution. Having started the year with 17 consecutive weeks of inflows, Europe Bond Funds have suffered outflows 18 of the subsequent 28 weeks. At the asset class level flows into Europe Inflation Protected Bond Funds hit a 12 week high while Europe High Yield Bond Funds absorbed fresh money for the sixth straight week.
 
Emerging Markets Bond Funds remain under pressure from the spectre of higher US interest rates and the impact that will have on dollar-denominated debt being serviced from income streams denominated in ruble, rupiah, rand, real and other emerging markets currencies. At the country level, however, China Bond Funds saw an outflow streak stretching back to July snapped as a domestic ETF with an intermediate term sovereign mandate absorbed over USD200 million.
 
Flows into US Bond Fund flows again favoured Intermediate Term and Mortgage Backed Funds while commitments to Short Term US Government Bond Funds rebounded sharply. US High Yield and Bank Loan Funds saw the biggest redemptions, although Municipal High Yield Funds recorded their ninth consecutive weekly inflow.
 
After a summer roiled by the fiscal woes of Detroit and Puerto Rico, Municipal Bond Funds are enjoying their longest inflow streak since a 19 week run ended in mid-February. At the state level funds dedicated to California, Oregon and Minnesota have fared well while those dedicated to New York have seen over USD700 million flow out since the beginning of July. 

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