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Thaw continues for Europe funds but US equity funds see biggest outflow since 2Q08

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With the yield on 10-year US Treasuries making a run at the three per cent level in anticipation of the beginning of the end for the Federal Reserve’s QE3 programme, investors pulled nearly USD20bn out of EPFR Global-tracked US equity and bond funds during the third week of August.

 
Expectations that the Fed will start winding down its bond buying program at some point in the next two months also kept the pressure on emerging markets bond and equity funds while redemptions from US financial sector funds climbed to their highest level since late 1Q09.
 
Although the outflows from US equity funds were the highest in over five years, the overall figure of USD12.3bn for all equity funds was tempered by another week of solid inflows for Europe equity funds as macroeconomic data continues to illustrate the rebound in that region’s economy. Redemptions from all bond funds during the week ending August 21 hit an eight week high of USD7.43bn. At least some of the money that flowed out of equity and bond funds ended up in money market funds which absorbed a net USD22bn.
 
At the country and regional level funds tied to emerging Europe stumbled despite the renewed appetite for exposure to developed Europe and investors put more distance between themselves and the BRIC (Brazil, Russia, India and China) theme.
 
Investors in several major emerging markets, meanwhile, have been stocking up on gold. That has helped drive its price up to a two-month high and boost flows into gold funds to their highest level since the week ending January
  
The third week of August saw EPFR Global-tracked emerging markets equity funds turn in their worst weekly performance since mid-2Q12, a collective drop of 4.41 per cent, as investors contemplated life after QE3 and headed for the sidelines. Overall redemptions totalled USD1.72bn with Asia ex-Japan and Latin America equity funds accounting for the bulk of the outflows. Retail investors continue to keep their distance: they last committed money to this fund group in early April.
 
Small continued to be better than big in the minds of many EM investors, with frontier markets funds posting inflows for the 30th time in the 33 weeks year-to-date while BRIC equity funds extended an outflow streak stretching back to early November. All four of the fund groups dedicated to the individual BRIC markets posted outflows, with China equity funds seeing money flow out for the 15th straight week and redemptions from Brazil equity funds hitting a 35 week high.
 
EMEA equity funds saw outflows jump to their highest level since late June as Russia’s slowing economy, conflict in the Middle East and profit taking – some EMEA country funds gained over 20 per cent between May and mid-August – hit this fund group. Outflows from emerging Europe regional equity funds hit a 12 week high despite the brighter economic data being generated by the European Union.
 
One EMEA country fund group continues to get a pass from investors, with South Africa equity funds getting inflows for the ninth time in the past 13 weeks even though markets running high current account deficits are particularly unpopular with investors.
 
“This South Africa flow may reflect investors getting in ahead of an anticipated rebound in the price of gold,” says Cameron Brandt, EPFR Global’s director of research. “It may also signal that investors are following the lead of fund managers and viewing South Africa as a lower risk “gateway” to Africa’s growth story.”
 
Retail investors bailed out of EPFR Global-tracked developed markets equity funds for the first time since the fourth week of June as overall redemptions from this fund group hit their highest level since mid-4Q11. US equity funds accounted for the bulk of the outflows recorded during the week ending August 21, swamping sold flows into global and Europe equity funds.
 
Big institutional redemptions drove the outflows from US equity funds, 70 per cent of which were attributable to a single large cap ETF, as consensus hardened around an early start to the ‘tapering’ of QE3. Retail flows were also negative for the first time in eight weeks, although daily data showed redemptions moderating towards the end of the week.
 
Investors looking to Europe retained their preference for regional versus country-specific exposure as Europe equity funds extended their longest inflow streak since 1Q07. Europe and Europe ex-UK regional equity funds accounted for nearly all the week’s inflows while Greece, Spain and UK equity funds were the only country fund groups to attract more than USD10m.
 
Japan equity funds, meanwhile, recorded outflows for only the third time year to date as US investors pulled out money for the fourth week running. Data continues to show an export-led recovery and greater optimism among Japanese consumers. But recent gains have come at the cost of a growing trade deficit, hikes in the country’s sales tax loom and domestic business investment has yet to really pick up.
 
It was a good week for the largest of the diversified developed market equity fund groups – global equity funds which recorded their biggest weekly inflow since late January as the YTD total moved past the USD67bn mark.
 
EPFR Global-tracked commodities sector funds posted their biggest inflow since the second week of January as mid-August saw more positive manufacturing and industrial numbers emerge from Europe and China. The week ending August 21 also saw telecoms sector funds post their biggest inflow since late 3Q10, financial sector funds record their biggest outflow since mid-4Q12 and over USD900m flow out of consumer goods sector funds.

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