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Market and fund flows dry up ahead of second quarter

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With holidays looming and the second quarter earnings season starting, both market and fund flow data painted a picture of investors heading to the sidelines in early July.

With holidays looming and the second quarter earnings season starting, both market and fund flow data painted a picture of investors heading to the sidelines in early July.

EPFR Global-tracked emerging markets equity funds collectively posted outflows for the second time in three weeks, flows into US bond funds dropped below the USD1bn mark for the first time in 14 weeks and investors pulled over USD100m out of six of the nine major global sector fund groups.

Flow data from fixed income fund groups for the week ending 8 July also suggests that some investors fear they may return from their summer vacations to find inflation, not economic growth, gathering steam.

Both US and global bond funds benefited from interest in funds with an inflation protection mandate.

Investors made considerable net contributions to US short term bond funds and short term government bond funds while pulling more than USD740m from the US intermediate term bond funds.

Despite the rising risk aversion, cash did not flow back into money market funds which are noted for their minimal returns.

There was a modest appetite for diversified exposure, with global emerging markets, global and Pacific equity funds all recording inflows and global bond funds extending their winning streak to 13 straight weeks.

Overall, equity funds posted outflows of USD1.87bn during the first week of July while fixed income funds absorbed a net USD2.95bn.

Fresh doubts about US appetite for emerging markets exports and global demand for raw materials prompted investors to pull some money off the table in early July, with EPFR Global-tracked Asia ex-Japan and Latin America equity funds surrendering USD365m and USD307m respectively, more than offsetting the USD131m absorbed by GEM equity funds and the USD1m taken in by EMEA equity funds.

At the country level investors removed USD424m from China equity funds and USD244m from Brazil equity funds. But they committed modest sums to Russia equity funds despite the pressure on oil prices and reacted to the general disappointment voiced about India’s latest budget by steering USD52m into India equity funds.

BRIC equity funds also fared well, taking in fresh money for the 16th consecutive week as year-to-date inflows approach USD2bn. And funds investing in the so-called frontier markets enjoyed a better week, with flows into Africa regional and Vietnam equity funds hitting YTD and seven week highs respectively.

Fears that spring’s green shoots could wither in the harsh light of the 2Q 09 earnings season weighed on developed markets and the funds that invest in them during early July, with US equity funds recording outflows for a fourth straight weeks and Europe equity funds for the seventh time in the past eight weeks.

US equity funds started the third quarter by recording another week of modest outflows as government officials dropped heavy hints that more stimulus spending may be needed to pull the world‚s largest economy out of the doldrums.

Although some small cap ETFs had a solid week, their inflows were more than offset by outflows from large and mid cap and US sector funds. Performance again favoured funds managed for value, although large cap funds bucked this trend.

Growth in developed Europe is, by some measures, pulling out of its steep decline. But investors remain leery of its ability to recover swiftly, especially if US consumers keep their wallets shut, and they pulled another USD604m out of Europe equity funds.

Japanese surveys and indexes, meanwhile, continue to fuel hopes of a modest recovery starting with positive growth during 2Q 09. Although there are plenty of sceptics who believe that a strong yen, a weak US recovery and even weaker domestic demand will shackle the Japanese economy well into 2010, Japan equity funds posted inflows for the second straight week, taking in a net USD147m for the week.

The two major diversified fund groups that invest primarily to developed markets both took in fresh money, with global equity funds absorbing USD659m and Pacific equity funds USD84m.

Having seen inflow streaks of 16 and 12 week snapped in late 2Q 09, EPFR Global-tracked commodity and energy sector funds started the third quarter by posting another week of outflows as projections for demand remained flat at best. In the case of energy sector funds, the USD452m redeemed by investors was the biggest weekly tally since late December.

With markets and investors searching for direction, tactical trading via ETFs appears to be making a come back. During the first week of July the USD720m that flowed into consumer goods sector ETFs the previous week flowed back out, mirroring similar ebbs and flows in financial sector ETFs in late June

The four major EPFR Global-tracked bond fund groups continued to attract money in early 3Q 09 as the possibility of inflation garnered fresh attention in the wake of remarks by US officials suggesting more stimulus spending may be on the table.

High yield bond funds took in fresh money for the 16th time in 17 weeks, emerging and global bond funds recorded their 13th consecutive week of inflows and US bond funds maintained their record of taking in fresh money every week YTD.

Money market funds, however, posted outflows of USD2.68bn for the week despite the general uncertainty evident among investors.

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