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Market turmoil chases over USD10bn out of EM equity funds


Going into the final days of August EPFR Global-tracked Emerging Markets Equity Funds look set to record their biggest weekly outflow in over seven years as pessimism about the health of the Chinese economy hammered global equity markets.

Also caught up in the rout were Europe Bond and Equity Funds, which saw net redemptions during the week ending August 26 hit eight and 43 week highs, while outflows from Global Equity and Bond Funds climbed to levels last seen in 4Q14 and 3Q13 respectively. Balanced, Emerging Markets and High Yield Bond Funds posted their biggest outflows year-to-date.
Overall, preliminary numbers based on combined daily and intraday data, which have a more than 85 per cent correlation with the weekly numbers that will appear later today, for the week show that investors pulled over USD25 billion out of EPFR Global-tracked Equity Funds and close to USD10 billion from Bond Funds while committing over USD20 billion to Money Market Funds. Daily data does show redemptions moderating on the final day of the reporting period as investors responded to cuts in Chinese interest rates and the hope that recent events will stay the Federal Reserve's hand when it comes to increasing US interest rates.
At the country and asset class level Gold Funds recorded their biggest inflow since February, Japan Equity Funds swam against the tide of outflows, Thailand Bond Funds saw their current inflow streak come to an end and redemptions from India Equity Funds hit their highest total since 1Q08.
Fears about the health of the Chinese economy continued to roil global equity, commodities and currency markets in late August and provide investors with reasons to pull out of Emerging Markets Equity Funds. Pull out they did, removing over USD4.5 billion from both Asia ex-Japan and the diversified Global Emerging Markets (GEM) Equity Funds during the week ending August 26 and driving redemptions from EMEA Equity Funds to a 35 week high.
Among the EM Country Fund groups hit hard by investors' aversion to the combination of currency weakness and dependence on commodities exports were Russia and Brazil Equity Funds. Redemptions from Russia Equity Funds hit their highest level since the third week of 2014 as the country's currency slumped to a seven month low against the US dollar. GEM Equity Fund allocations for this market are, however, holding steady around 4 per cent of the average portfolio after rebounding from a 14 year low in 1Q15.
For the third time in the past four weeks funds with regional rather that dedicated China mandates accounted for the biggest slice of the outflows from Asia ex-Japan Equity Funds. Investors did pull
another USD1 billion from China Equity Funds, although local currency flows turned positive as the week progressed, and punished India Equity Funds for that country's stalling reform story by redeeming the largest weekly amount since the third week of 2008. But Thailand Equity Funds are on track to record inflows for the seventh time in the past nine weeks thanks to domestic money looking for alternatives to bank accounts that are no longer fully covered by government-backed guarantees.
Appetite for the riskier frontier markets continues to wane. Frontier Equity Markets Funds, which invest in countries such as Nigeria, Pakistan and Argentina, have posted outflows 21 of the 34 weeks YTD with the latest week's redemptions the biggest since mid-June.
All of the major EPFR Global-tracked Developed Markets Equity Funds except Japan Equity Funds experienced significant redemptions during the fourth week of August as mutual fund investors retreated on a broad front. Europe Equity Funds saw a 14 week inflow streak snapped while Global Equity Funds recorded their biggest outflow since mid-December.
In addition to the general uncertainty, Europe Equity Funds were hit by the unraveling of Greece's coalition government which negotiated and approved the terms of the latest bailout package. As was the case in late 4Q14, investors are not taking kindly to the prospect of Greek voters being given the chance to provide their politicians with another anti-austerity mandate: redemptions from Greece Equity Funds hit a 36 week high.. At the country level France Equity Funds attracted their biggest weekly inflow in over a year despite the country's lackluster GDP numbers for the second quarter.
Japan's 2Q15 GDP numbers were also underwhelming. Foreign investors have taken a step back as they wait to see if this will translate into additional quantitative easing by the Bank of Japan and greater effort on the part of the government to implement promised structural reforms. But Japan Equity Funds attracted over USD3 billion in yen-denominated flows during the week ending August 26 that went mainly to domestically domiciled ETFs.
Flows for US Equity Funds, meanwhile, rebounded towards the end of the week but remained in the red with Large Cap Equity Funds seeing the biggest outflows. Actively managed Small and Large Cap Growth Funds did attract modest inflows. YTD investors have pulled over USD135 billion from US Equity Funds with retail redemptions accounting for three-quarters of that total.
The largest of the diversified Developed Markets Equity Fund groups, Global Equity Funds, saw outflows surge. Money left funds with fully global mandates at four times the pace of the redemptions from Global ex-US Equity Funds.
A surge of money into Gold Funds helped Commodities Sector Funds post back-to-back weekly inflows for the first time since early May, making it one of only two Sector Fund groups among the 11 major ones tracked by EPFR Global to take in fresh money during the week ending August 26. Four of the groups, Financial, Technology, Healthcare/Biotechnology and Consumer Goods Sector Funds , posted outflows for the week in excess of USD1 billion as investors projected the impact of weaker emerging markets currencies on bank balance sheets and consumer demand for technology products.
The redemptions from Healthcare/Biotechnology Sector Funds were the biggest on record, exceeding USD2 billion, but still left this group as the YTD leader in both flows and performance terms. In flows as a percentage of AUM terms flows into pure Biotechnology Funds have now slipped behind those going into the overall group.
Infrastructure Sector Funds, one of the stars of 2014 when it came to attracting fresh money, continue to see cash flow out as investors pencil in lower demand for new private energy infrastructure, tight fiscal policy in Europe and China's stated ambition to reduce fixed investment spending's role in its economy.
For fixed income investors a desire to cut risk in late August trumped the further erosion of the recent consensus that the US Federal Reserve will hike interest rates at its September meeting. Outflows from High Yield and Emerging Markets Bond Funds jumped to 35 and 113 week highs while Europe Bond Funds saw their five week inflow streak come to an end as weak 2Q15 numbers and the latest shifts in Greek politics sapped investor confidence.
Among the risks investors are worried about is liquidity risk. Concerns about the ability of multi-asset managers to unbundle their products to meet a spike in redemptions has crimped recent flows into both Balanced and Total Return Bond Funds. The latter posted consecutive weekly outflows of over USD1 billion for the first time since EPFR Global started tracking this fund group in 2Q03.
Redemptions from Europe Bond Funds were driven by outflows from Europe ex-UK Regional Funds , which had their worst week since late June. At the country level Germany Equity Funds recorded their biggest inflows since early 4Q14.
Emerging Markets Bond Funds with regional mandates also saw the biggest outflows during the week. China and Thailand Bond Funds were the least loved at the country level.
Among US Bond Funds those dedicated to high yield debt accounted for the bulk of the week's outflows, with Total Return, Intermediate Term, Inflation Protected and Bank Loan Funds also experiencing significant redemptions that were partially offset by commitments to Short Term, Mortgage Backed and both Short and Long Term US Government Bond Funds.

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