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Data, earnings reports, central banks and Europe keep investor compasses spinning


Flows into all EPFR Global-tracked Bond Funds during the week ending 4 July were about a fifth of their year-to-date weekly average while US exchange-traded funds accounted for nearly all of the net USD8.93bn absorbed by equity funds.

With the European and Chinese central banks cutting interest rates, the US Federal Reserve extending Operation Twist and the Bank of England launching a third round of quantitative easing the pressure on those holding cash and “safe” assets such as investment grade US debt climbed several notches.

Europe money market funds posted record setting outflows during a week when money market funds overall surrendered USD21.54bn and investment grade US bond funds saw over USD2bn flow out while high yield bond funds pulled in over USD1.5bn for the third straight week and flows into emerging markets bond funds climbed to an eight week high.

The announcement following the previous week’s summit that Eurozone rescue funds can be deployed without the previous level of oversight and can also be used to provide direct aid to banks had a modest impact on fund flows. Europe and emerging Europe equity funds posted modest inflows while Europe bond funds extended their current outflow streak.

EPFR Global-tracked emerging markets equity funds eked out inflows during the first week of July as the prospect of more stimulus and more accommodative rescue policies for weaker Eurozone markets were offset by the latest US manufacturing data and fears that China’s economic growth slipped to a three year low during the second quarter. The diversified global emerging markets equity funds posted the week’s biggest inflow, taking in USD148m, while Asia ex-Japan equity funds again recorded the largest outflows among the four major emerging markets fund groups.

China equity funds experienced net redemptions for the 10th straight week ahead of the second interest rate cut in less than a month. That is their longest outflow streak since a 13 week run ended in late June, 2007, and reflects the lack of domestic support for Chinese equities and fears that its economic growth may undershoot the official target of 7.5 per cent for the year. Investors looking for emerging Asian exposure in recent weeks have turned to Taiwan. The island’s benchmark equities index has rallied to a two month high on the back of expectations that US and European policymakers will try to stimulate their economies. Taiwan equity funds have now attracted fresh money six of the past eight weeks.

Hopes of a less austere approach to solving the Eurozone debt crisis also helped emerging Europe equity funds post back-to-back weeks of inflows for the first time since early February. But doubts about demands for energy and commodity exports continue to be a major headwind for EMEA equity funds overall, with Russia and Middle East and Africa equity funds posting their 11th and 12th straight week of outflows respectively.

Latin America equity funds are also struggling with the gloomier outlook for US, European and Chinese demand. But funds dedicated to the regional markets with the most orthodox economic policies – Mexico, Chile and Brazil – all managed to attract fresh money.

Flows into EPFR Global-tracked developed markets equity funds during the week ending 4 July were dominated by a handful of US large cap ETFs. These more than offset the first week of outflows from Japan equity funds since mid-April and the biggest weekly redemptions from global equity funds since mid-3Q11.

The net redemptions from Japan equity funds came during a week when actively managed funds snapped a 13 week outflow streak.

“It looks as if the Bank of Japan saw private money finally coming back in and backed off on their purchases via ETFs,” says Cameron Brandt, director of research at EPFR Global.

Europe equity funds recorded back-to-back weeks of inflows for only the second time YTD as investors digested the bolder than expected promises that emerged from the previous week’s EU summit. There was a marked preference for diversified exposure via Europe ex-UK regional funds, but dedicated Italy, Spain, Ireland and Greece equity funds all saw modest inflows during the week.

Flows into US equity funds favoured those with Large Cap or sector mandates.

“Nearly all the money went into ETFs, and it looks like a combination of ‘safe haven’ flows from those not convinced by the latest Eurozone initiative and positioning ahead of the second quarter earnings season,” says Brandt.

The two major diversified developed markets equity fund groups again took different tacks, with global equity funds seeing over USD1.5bn pulled out – the most since August of last year – while Pacific equity funds posted inflows for the second week running.

The 11 major EPFR Global-tracked sector fund groups posted inflows for the third time in the past four weeks during early July, with both defensive and growth-oriented sectors attracting fresh money. Only commodities, infrastructure and real estate sector funds experienced redemptions while the other eight posted inflows ranging from USD14m to USD517m. Performance for the week was strong with gains ranging from 2.1 per cent for telecom sector funds to 6.7 per cent for energy sector funds.

Real estate sector funds posted the most eye-catching number, a record setting outflow of USD1.3bn that was largely attributable to a single fund group.

The fears about global growth that triggered the latest rate cuts and QE programmes were reflected in the commodities sector fund outflows, which included the first outflow from gold and precious metals funds since the third week of May. But funds with a focus on agricultural commodities had their best week since mid-January as extreme weather in the US raised concerns about corn and wheat supplies.

Elsewhere, healthcare/biotechnology sector funds took in fresh money for the third straight week as the US Supreme Court affirmed the individual mandate at the heart of the healthcare reform package championed by President Obama.

Flows into EPFR Global-tracked Bond Funds during the week ending 4 July suggested yield hunger was, at least for the moment, trumping capital preservation. High yield bond funds took in USD1.7bn and emerging markets bond funds over USD850m while municipal and mortgage backed bond funds extended their current inflow streaks to 44 and 68 consecutive weeks respectively. US investment grade bond funds, meanwhile, were hit hard as US bond funds overall had their worst week since early November.

The US bond fund groups seeing the biggest redemptions were short and intermediate term government and intermediate term bond funds. The US Federal reserve recently announced it will continue its programme of selling short term debt to finance bond purchases aimed at driving down rates at the long end of the curve.

Funds with significant exposure to Europe again struggled despite the outcome of the EU summit. Europe bond Ffnds posted their fourth straight week of outflows and global bond funds experienced net redemptions for only the third time YTD.

Flows into emerging market bond funds, which pushed the YTD total in striking distance of the USD24bn mark, ran roughly five-to-two in favour of funds with hard rather than local currency mandates.

Balanced funds, which invest in both fixed income assets and equities, posted their second biggest weekly outflow YTD.

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