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After posting net outflows of over $13.5 billion for two straight weeks, emerging market equity and bond fund flows were essentially neutral last week. Pacific equity, global bond and global equity funds ended losing streaks of seven, four and three weeks respectively and net outflows from Europe equity funds dropped to their lowest level in over five months.
Many investors continue to opt for the perceived safety of money market funds during these volatile times, and remain wary of funds geared to the developed G7 markets. They have responded to the uncertainty surrounding the US and European banking sectors by pulling $1.44 billion out of financial sector funds over the past week.
ôInvestors seem to be oscillating between seeing attractive valuations in the financials sector and seeing the sky falling in,ö says Brad Durham, Massachusetts-based managing director at EPFR Global.
US equity and bond funds both posted net outflows last week, although EPFR GlobalÆs daily data showed sentiment towards US bond funds û which had been receiving safe-haven flows going into February û recovering towards the end of the week. US municipal bond funds appear to have settled down as well as these funds have received year-to-date net inflows of $665 million after losing about $2 billion to net outflows in the last three months of 2007 on fears that the fiscal health of US municipalities would be harmed by the subprime and credit market crisis.
Year-to-date, US, Japan and Europe equity funds that EPFR Global tracks weekly have collectively posted net outflows totaling $58.7 billion, 98.4% of the total pulled out during all of 2007.
In terms of percentage of assets under management, Japan equity funds continue to be hit the hardest. Investors pulled $502 million out of these funds last week, the 44th time in the past 45 weeks these funds have posted net outflows. Consumer confidence, job growth, domestic fixed investment and exchange rate numbers all suggest that Japanese companies û even the better managed ones û will struggle to maintain the healthy profit growth they recorded in recent years, according to EPFR Global.
The outlook for European companies is also cloudy, with a number of fourth quarter 2007 earnings reports suggesting that weaker US demand, higher energy and raw material costs, tighter credit and an unfavorable exchange rate are beginning to take their toll. Investors have now pulled money out of Europe Equity Funds for 23 straight weeks, although one of the two major sub-groups, Europe ex-UK equity funds, posted net inflows for the week.
ôBetween the better valuations created by the recent sell-off and the fact that the European Central Bank appears to be switching its focus from inflation to growth, thereÆs a good chance these funds will start attracting money again in the near future,ö says Massachusetts-based EPFR Global analyst Cameron Brandt. ôThe wildcard remains the scope of the regionÆs banks to the US subprime mess, and the Societe Generale fraud isnÆt doing much to reassure investors that the regionÆs regulators are on top of things.ö
Meanwhile, the US Federal ReserveÆs latest 50bp interest rate cut seems to have raised more questions about the health of the US economy than it answered. Investors pulled out $9.57 billion from US equity funds, with the bulk of that coming from large-cap exchange traded funds. For the third straight week, large-cap growth and mid-cap growth funds fared better in terms of flows than their value counterparts, even though value has outperformed growth across all capitalisations during that period.
Despite posting by far the best performance of the four major emerging markets equity fund groups, Asia ex-Japan equity funds recorded net outflows for the eighth consecutive week. Flows in and out of funds at the country level were generally subdued, with Thai equity funds posting net inflows for the first time in five weeks, the breakdown of which wasnÆt available.
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