Stock markets worldwide have continued to fall due to fears that the worst of the US credit crunch is not yet over and that the crisis is spreading to Europe. On Wall Street, the Dow Jones Industrial Average fell as much as 800 points on Monday, pulling it below a key psychological level of 10,000 for the first time since October 2004. It fell another 508 points or just over 5% on Tuesday.

Investors have reacted to the financial turmoil and slowing global growth by reducing their exposure to emerging and European markets and gravitating towards the safest asset classes available, according to data from Massachusetts-based EPFR Global, which tracks around $10 trillion in assets in traditional and alternative funds worldwide.

Compared to the second quarter, however, the definition of ôsafestö assets has changed significantly. Latin America equity, balanced and Europe, Middle East and Africa (EMEA) equity funds û which carried net inflows into the quarter û are now in negative territory.

Ironically, it appears that US equity funds are now being deemed as the safest relative to other investment opportunities in equities. A net $42 billion has flowed into previously shunned US equity funds over the past 13 weeks. This is the same period that saw historic falls on Wall Street, indicating that investors are either bargain hunting or keeping the faith in the fundamentals of select US stocks despite the current market turmoil.

During the final week of September investors pulled significant sums out of global and Europe equity, global, US and emerging markets bond, energy, financial and real estate sector and balanced funds. They committed $7.9 billion to US equity funds, $5.9 billion to money market funds and $1 billion û a 10-week high û to the diversified global emerging markets (GEM) equity funds.

ôDuring the past quarter weÆve seen a marked shift away from the pattern of the past three years,ö says EPFR Global managing director Brad Durham. ôInvestors have moved out of emerging market and global equity and bond funds and back into US equity and bond funds that could have been driven by several factors, including a classic flight to so-called safety, expectations of US dollar strength, and investors using ETFs to short the market.ö

The list of fund groups tracked by EPFR Global with positive momentum going into the current quarter is a small one.

Most of the fund groups that entered the third quarter on a high û such as Russia, Taiwan and Middle East and Africa regional equity, emerging markets local currency bond and balanced funds û have lost their momentum.

The picture in Asia overall is gloomy, when looking at the full-year scenario. EPFR Global data shows that Asia ex-Japan suffered $15.6 billion in net outflows in the first nine months of 2008 compared with a net inflow of $9.7 billion in the same period in 2007. Asia ex-Japan funds still account for the biggest share of outflows from all emerging market funds in US dollar terms, although Latin America funds have surpassed them in terms of outflows as a percentage of assets under management.

There appears to be some promise in Asia, however.

China equity funds have now posted inflows for 10 of the past 13 weeks. These funds stand out among emerging market equity funds for posting a net inflow of $3.1 billion in the first nine months of 2008 compared with a net outflow of $2.8 billion in the same period in 2007.

Japan equity funds are starting to take in fresh money and money market funds absorbed a net $40.8 billion during the third quarter. Japan equity funds posted their second straight week of inflows as investors make careful bets that the relative health of JapanÆs banking system, the preference for corporates to fund their expansion out of profits, and the new administrationÆs willingness to put growth ahead of fiscal consolidation will allow the worldÆs second largest economy to bounce back sooner than expected.