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Japan funds extend inflow streak

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After pausing in early September, global equity markets resumed their advance as optimism about the outlook for the global economy in 2010 convinced many investors that current valuatio

After pausing in early September, global equity markets resumed their advance as optimism about the outlook for the global economy in 2010 convinced many investors that current valuations are justified, according to a report by EPFR Global.

During the week ending 9 September flows into Europe equity funds hit a five week high, Japan equity funds had their third best week year-to-date and EMEA equity funds extended their current inflow streak to eight straight weeks while money market funds surrendered another USD14.9bn. Investors have so far this year pulled USD284.7bn out of money market funds tracked weekly by EPFR Global.

The risk aversion evident going into September did not evaporate completely. There was a clear preference for diversified exposure among equity investors and bond funds investing in the more conservative fixed income asset classes again attracted the lion’s share of the total inflows.

Emerging markets bond funds saw their 21-week, USD3.6bn net inflow streak snapped while flows into high yield bond funds were well below the USD606m a week this fund group has averaged since mid-March.

Overall, the bond funds tracked by EPFR Global took in a net USD3.56bn for the week, of which US bond funds accounted for over two thirds. Municipal bond funds received inflows of nearly USD1bn while short term and intermediate term bond funds also fared well.

Meanwhile, redemptions from US equity funds was the driving force behind the USD2.5bn of outflows chalked up collectively by equity fund groups.

With investors finding value in Chinese equity after the recent sell-off and commodity prices resuming their ascent, modest amounts of fresh money found their way into Asia ex-Japan, Latin America and EMEA equity funds during the week ending 9 September.

The diversified global emerging markets equity funds did post net outflows of USD45m, but overall emerging markets equity funds absorbed USD434m.

Among the Asia ex-Japan equity funds, those investing solely in China took in over USD400m for the week. But Taiwan equity funds extended their current outflow streak to five weeks and USD789m, and Asia regional funds also suffered redemptions.

Enthusiasm for the other BRIC (Brazil, Russia, India and China) markets and the BRICS theme was muted, with Russia equity funds taking in USD30m while BRIC funds, Brazil and India equity funds posted outflows ranging from USD5m to USD76m. Funds investing in Indonesia, a market that some argue should be included in an expanded BRICs grouping extended their current inflow streak to ten straight weeks.

Funds offering diversified exposure to developed markets generally fared better than their single market counterparts during the first full week of September, with Europe and global equity funds attracting the biggest inflows and US equity funds seeing the largest outflows. Sentiment towards European markets was helped by reports that major banking plays are no longer taking advantage of the European Central Bank’s liquidity measures and that some are getting ready to pay back state loans. EPFR Global-tracked Europe equity funds absorbed a net USD815m for the week, paced by flows into Europe ex-UK regional ETFs and actively managed Germany equity funds.

Japanese equity markets moved sideways during the week as investors waited to see where the money for the incoming Democratic Party led government‚s expanded social safety net will come from. But Japan equity funds took in another USD181m, their fourth straight week of inflows, as some investors bet the new government will inject some life into Japan ‘s perennially lackluster consumer demand.

American consumers, meanwhile, are still struggling with flat wages, rising unemployment and the need to pay down debt. US equity funds saw redemptions totaling USD4.73bn, with large cap ETFs again accounting for the majority of the outflows and growth style funds outperforming their value counterparts across all capitalizations. Both of the major diversified fund groups investing primarily in developed markets recorded inflows. 

Global equity funds took in USD636m for the week and Pacific equity funds, helped by renewed enthusiasm for Australia’s commodity exports to China story, absorbed another USD69m.

During a week when the price of gold moved north of USD1,000 an ounce and copper price forecasts for 4Q10 climbed over USD7,500 a ton, commodity sector funds took in USD621m – four times as much as the sector fund group with the next largest inflows – as the YTD total for this fund group moved with striking distance of USD8bn. Dollar weakness also contributed to the inflows, which were concentrated among a number of ETFs.

Real estate and financial sector funds recorded inflows of USD156m and USD121m respectively as signs of recovery in key housing markets fueled hope that bank balance sheets will make better reading going into the fourth quarter.

The Kraft-Cadbury saga, and speculation about other potential mergers and acquisitions, helped technology and consumer goods sector funds attract modest amounts of fresh money, but the rising volume of the debate over US healthcare reform was reflected in the USD43m pulled out of healthcare/biotechnology sector funds.

A weaker dollar and fresh estimates of just how much debt the US will be issuing over the next few years did not deter investors from stuffing another USD2.73bn into US bond funds during the week ending 9 September. This fund group has now taken in over USD2bn for six straight weeks and over USD1bn 25 of the past 27 weeks as YTD inflows move over the USD51bn mark.

Also taking in fresh money were global bond, balanced and high yield bond funds which extended their current inflow streaks to 22, 23 and 11 weeks respectively. In the case of global bond funds it is their longest stretch of inflows since a 27-week winning run ended in mid-February, 2007.

The one bond fund group that did not post inflows, emerging markets bond funds, saw their lengthy winning streak ended by outflows from funds investing in riskier local currency debt.

‘Given the direction of commodity prices, this may simply be a response to the spike in risk aversion the previous week that saw the EMBI+-US Treasuries spread bounce back towards 400 basis points,’ says EPFR Global senior analyst Cameron Brandt.

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