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US equity and HY bond funds benefit from Fed decision and budget compromise

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Flows into US Equity Funds jumped to a six week high and US High Yield Bonds posted their fourth biggest inflow year-to-date during the fourth week of October as Congress moved closer to passing a budget deal and the Federal Reserve kept interest rates unchanged.

On the other side of the Atlantic some encouraging numbers for the Eurozone's service sector and expectations of further easing by the European Central Bank were reflected in combined inflows of nearly USD5 billion for Europe Bond and Equity Funds, with the latter recording their biggest weekly inflow since the beginning of September.

Overall, preliminary numbers based on daily data for the week ending October 28 indicate EPFR Global-tracked Equity Funds are on course to take in over USD13 billion, Bond Funds around USD4 billion and Money Market Funds around USD30 billion of which two-thirds has gone to US Money Market Funds.

At the country and asset class level Dividend Equity Funds look set to snap an outflow streak stretching back to mid-July, flows into Italy Equity and Spain Bond Funds hit eight and 38 week highs respectively and Bank Loan Funds recorded their biggest weekly inflow since mid-July.

The week ending 28 October saw EPFR Global-tracked Emerging Markets Equity Funds extend their longest inflow streak since early July with the bulk of the new money flowing into the diversified Global Emerging Markets (GEM) Equity Funds. Cautious optimism about China's economy, the US Federal Reserve's caution when it comes to raising interest rates for the first time since 2006 and expectations of additional monetary stimulus in Europe have all contributed to this modest rebound in both flows and performance.

At the country and regional level China, Indonesia, Turkey and Argentina Equity Funds have turned in the biggest performance gains since the beginning of October. Among the laggards over that span are Saudi Arabia, Bangladesh and Ukraine Equity Funds.

The strong performance by Argentina Equity Funds is rooted in hopes of political change, with a run-off election next month to decide who succeeds the strongly interventionist President Christina Fernandez Kirchner. Statist administrations in Brazil and Venezuela are also under pressure, prompting some investors to reassess the medium term outlook for South America.

GEM Equity Fund managers are, however, waiting for proof: the latest allocations data shows their average weighting for Latin America hit a new record low coming into 4Q15. Latin America Equity Funds, meanwhile, continue to rotate exposure from Brazil to Mexico, with the latter's average weighting now at its highest level since 3Q04.

Among the Emerging Asian markets China continues to stand out with China Equity Funds, which saw a 10 week run of outflows end in mid-September, taking in fresh money for the fifth time in the past six weeks.

For the second week running all four of the major EPFR Global-tracked Developed Markets Equity Funds posted inflows as mutual fund investors pushed back the date of the first US rate hike in over nine years into next year and penciled in further accommodation by the ECB.

The Federal Reserve's latest postponement of a much signalled – and anticipated – rate hike came as US lawmakers were moving forward with a two year budget that will raise the Federal debt ceiling and avert another damaging period of political brinksmanship. With these tailwinds behind them, US Equity Funds took in fresh money for the third straight week, their longest such run since the first half of June, with Large Cap Blend and Growth Funds seeing the biggest inflows. The latest sector allocations data for this fund group shows that managers continue to cut their exposure to energy, pulled back from financials and healthcare during September and added to their information technology, consumer discretionary and industrials allocations.

This renewed enthusiasm for US equity was also reflected in the week's Global Equity Fund flows. Commitments for funds with fully global and ex-US mandates were roughly equal, a rare occurrence in a year when ex-US funds have absorbed the lion's share of the money flowing into the largest of the diversified Developed Markets Equity Fund groups.

Japan Equity Funds recorded modest inflows, both yen and foreign currency denominated, during a week which ended with an encouraging bounce in September's industrial production numbers. 
Investors are anticipating more effort by the Bank of Japan to rekindle inflation and domestic consumption, both of which remain subdued despite the current aggressive quantitative easing program.

Flows into Europe Equity Funds were robust but heavily weighted towards those with regional rather than country specific mandates. Italy Equity Funds did enjoy solid inflows as investors continue to pencil in the boost expected from the nearly USD4 billion in tax cuts outlined in the 2016 budget.

Against the back-drop of a 3Q15 earnings season that has, so far, modestly exceeded the low expectations for it mutual fund investors continued during the fourth week of October to rebuild some of their sector positions. For the second week running eight of the 11 major Global Sector Fund groups tracked by EPFR Global absorbed fresh money. The inflows ranged for a few million dollars for Telecoms Sector Funds to around USD1 billion for Consumer Goods Sector Funds.

Among the fund groups seeing redemptions were Commodities and Energy Sector Funds. The latter were not helped by earnings reports from sector heavyweights Shell and BP that highlighted the impact of low oil prices on profits. Meanwhile, with the United Nations again pushing for a climate change agreement that limits carbon emissions, both Natural Gas and Alternative Energy Funds are seeing modest inflows.

The latest consensus that it will be next year before the US Federal Reserve deems conditions right to start hiking interest rates has boosted flows into Utilities Sector Funds as dividend paying stocks regain some of their lustre for investors.

The week ending October 28 saw EPFR Global-tracked Bond Funds post solid inflows that, while still favoring funds with US mandates, also encompassed Europe and Global Bond Funds. At the asset class level High Yield Bond Funds enjoyed another good week but investors pulled money from both of the major multi-asset fund groups.

Brazil remains the second largest country allocation after Mexico for diversified Emerging Markets Bond Funds. Mexico is also the biggest emerging market allocation for Global Bond Funds. Among the developed markets, Global Bond Funds have aggressively cut their exposure to Japan since mid-3Q15 and rotated exposure to Italy.

While fund managers are looking at Italy, investors focused on Europe are recovering some of their appetite for Spain Bond Funds. After a banner year in 2013 when flows into Spain Bond Funds accounted for two thirds of the inflows for all Europe Bond Funds this country fund group has struggled. At the asset class level Europe High Yield Bond Funds took in fresh money for a third straight week but Europe Mortgage Backed Bond Funds were on track to record their biggest weekly outflow since EPFR Global started tracking them in 3Q08.

Among US Bond Fund groups US High Yield Bond Funds again attracted the biggest inflows with Long Term Corporate and Intermediate Term Funds also extending their recent winning runs. Short Term US Government Bond Funds posted the biggest outflows for the second week running.

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