Fed gives Santa a green light to rally

A week marked by caution and muted fund flows ended with a burst of enthusiasm triggered by the US Federal Reserve’s acknowledgment of progress in the battle to curb inflation and a new ‘dot plot’ suggesting next year will see three interest rate cuts. A net $24 billion flowed into EPFR-tracked US Equity Funds on the final day of the reporting period – the biggest daily total in a year – while US Money Market Funds ended the week with their biggest daily outflow since Oct. 12.

Flows to China Equity Funds also surged during the second week of December, hitting a 15-week high, as the interest in Asia among equity investors that marked the third quarter reasserted itself. Japan Equity Funds snapped their longest run of outflows since April and India Equity Funds recorded their fifth largest weekly inflow year-to-date.

The Fed’s tone, and a 3.1% reading for consumer price inflation in November, kept the pressure on Physical Gold and Inflation Protected Bond Funds which posted their 34th and 48th outflow, respectively, of the year-to-date.

Image of a chart representing "Yearly flows (US$ millions) for Physical Gold, Inflation Protected and Cryptocurrency Funds, 2020-23"

Overall, the week ending Dec. 13 saw EPFR-tracked Equity Funds absorb a net $25.2 billion while Bond Funds attracted $2 billion. Investors pulled $708 million out of Alternative Funds, $4.4 billion from Balanced Funds and $31 billion from Money Market Funds.

At the single country and asset fund levels, flows into Norway and Sweden Bond Funds hit 15 and 23-week highs, respectively. Convertible Bond Funds racked up their 24th straight outflow, commitments to Silver Funds jumped to a 12-week high and Bank Loan Funds posted their ninth inflow during the past 10 weeks and 20th since the beginning of July.

 

Emerging markets equity funds

Accelerating flows into China Equity Funds drove the headline number for all EPFR-tracked Emerging Markets Equity Funds to a 15-week high going into the second half of December. Money flowed out of retail share classes and investors avoided diversified and EMEA-dedicated funds in favor of Latin America and Asia ex-Japan Equity Fund groups.

The latest China Equity Fund flows came during a week when Chinese economic policymakers held the annual Central Economic Work Conference to map out GDP growth targets for 2024 and the measures needed to achieve them. They signaled that next year’s growth target will be similar to this year’s and stressed the need to stabilize the real estate sector, but stressed stability when it comes to fiscal and monetary support for an economy flirting with deflation.

Investors utilizing hedge funds continue to cut their exposure to both China and India. Meanwhile, conventional India Equity Funds have recorded inflows for 39 straight weeks and 47 of the 50 weeks year-to-date.

Image of a chart representing "Cumulative flows (% of AUM) for China, India, Brazil and South Africa Hedge Funds, 2018-YTD"

While funds dedicated to emerging Asia’s two heavyweights are dealing with outflows, South Africa Hedge Funds have seen inflows pick up. The same is not true for regular Africa-dedicated funds, with Africa Regional Equity Funds posting outflows in 13 of the past 14 weeks and South Africa Equity Funds in six of the past nine weeks.

Latin America Equity Funds absorbed fresh money for the sixth straight week, a run that has seen $1.28 billion flow in, with the latest inflow the biggest since mid-July. Investors continue to build exposure to Argentina’s latest reform story – flows into Argentina Equity Funds over the past four weeks total nearly 100% of their mid-November AUM – and Chile Equity Funds posted their biggest inflow in over four months ahead of a second referendum on replacing the country’s existing dictatorship-era constitution.

 

Developed markets equity funds

With the US Federal Reserve signaling a likely end to higher-for-longer interest rate pain after their December policy meeting, a benchmark US index hit a fresh record high and flows into EPFR-tracked US Equity Funds hit a three-month high. Allied to solid flows into Canada Equity Funds and the snapping of Japan Equity Funds’ redemption streak, the fresh money handily offset outflows from other major Developed Markets Equity Fund groups.

Of the groups recording outflows during the second week of December, Global Equity Funds were the hardest hit, recording their biggest weekly outflow in nearly a year. Investors pulled $4 out of funds with fully global mandates for every $1 they redeemed from Global ex-US Equity Funds.

The headline number for US Equity Funds would have been significantly higher if outflows from retail share classes had not hit a level last seen in late 4Q21. Value trumped growth for investors, with flows following a recent seasonal pattern of surging in mid-December around the final ‘triple witching’ date of the year and largely reversing the following week.

Europe Equity Funds saw money flow out for the 40th week in a row as investors pencil in a recession for the Eurozone that investors fear could be shallower-for-longer if the currency union’s fiscal rules are not relaxed. Those investors focused on cutting country-specific rather than diversified exposure during the latest week. Both UK and France Equity Funds saw over $500 million redeemed – the latter posting their biggest outflow since 4Q21 – while Switzerland, Germany, Italy and Spain Equity Funds also posted outflows.

Image of a chart representing "Flows (% of AuM, x-axis) vs Performance (%, y-axis) for major Europe Country Fund groups YTD"

Oversea-domiciled Japan Equity Funds posted their fifth straight outflow, but flows into domestically based funds lifted the overall headline number into positive territory. Largely on the strength of flows into a single ETF, Leveraged Japan Equity Funds recorded their biggest inflow since the final week of October, but Japan Dividend Funds extended their longest outflow streak since the first quarter.

 

Global sector, industry and precious metals funds

As increasing numbers of sector-oriented investors checked out for the holiday season or adopted a defensive stance, those that remained active revisited the case for emerging markets. During the week ending Dec. 13, seven of the 11 EPFR-tracked DM Sector Fund groups reported outflows while nine of the EM Sector Fund groups received inflows.

Developed and Emerging Markets Technology Sector Funds did contribute equally to the overall group’s headline number, extending the current overall inflow streak to six weeks and $7.4 billion. The excitement over artificial intelligence, the capabilities of ChatGPT, and the post-pandemic shift towards home entertainment and offices has kept the money flowing all year. But the focus on Anime, Comic and Gaming Funds during the first seven months of 2023 has waned since August. The group did snap a four-week outflow streak this week with their largest inflow since early August while Artificial Intelligence Funds absorbed a five-week high inflow.

Image of a chart representing "Weekly Flows (in US$ millions) and Performance for Anime, Comic and Gaming Funds, in the past year"

Healthcare/Biotechnology Sector Funds saw another $571 million flow out. The subgroup of pure Biotechnology Funds, which make up roughly 12% of the sector’s total AuM, have posted inflows only 14 of the 50 weeks year-to-date, with the latest outflow the heaviest since early March. Life Science Funds are also struggling to attract fresh money.

Image of a chart representing "EPFR Quantitative Analytics"

Driven mainly by US-dedicated funds, redemptions from all Energy Sector Funds hit $1.4 billion in mid-December, extending their current outflow streak to seven weeks and $4.1 billion. The heaviest outflow from Oil & Gas Funds since the end of 1Q23 accounted for a third of the headline number for all funds. A mix of factors include a slowing global demand for oil and countries such as the US and Brazil ramping up supply are cooling investor appetite for oil exposure. But Natural Gas Funds extended their run of inflows to six weeks and $980 million, the longest stretch since mid-4Q21 (seven weeks).

Flows for Financial and Real Estate Sector Funds have moved opposite one another over the past five weeks. After a blip last week, the former enjoyed their fourth inflow of the past five weeks on the back of the third straight week of solid inflows for US Bank Funds.

Bond and other fixed income funds

Year-to-date flows into EPFR-tracked Bond Funds crept over the $360 billion mark during the second week of December as the group recorded their 46th weekly inflow of 2023. All of the major geographic groups except Emerging Markets Bond Funds posted solid inflows that ranged from $44 million for Asia Pacific Bond Funds to $2.4 billion for US Bond Funds.

With the debate shifting from how long current interest rates will be in force to the timing of the first cuts, Short Term Bond Funds posted their fifth straight outflow and seventh over the past eight weeks while flows to Long Term Bond Funds rebounded. In the case of US Bond Funds with long-duration mandates, flows hit a 19-week high.

Image of a chart representing "Cumulative flows (US$ millions) for US Bond Funds by duration, 2020-YTD"

At the asset class level Inflation Protected Bond Funds, which have only posted five weekly inflows since the beginning of 3Q22, recorded their 14th straight outflow. Mortgage-Backed Bond Funds took in fresh money for the eighth time over the past 10 weeks, High Yield Bond Funds extended their longest inflow streak since 3Q21 and Bank Loan Funds chalked up their 22nd inflow of 2H23.

Among Europe Bond Funds, flows to funds with sovereign mandates climbed to an eight-week high while Europe Corporate Bond Funds posted their first outflow since late October. Retail share classes attracted fresh money for the 14th consecutive week.

Despite the promise of lower US interest rates and another rate cut by Brazil’s central bank, redemptions from Emerging Markets Bond Funds hit an eight-week high with over $800 million flowing out of both hard and local currency funds. At the country level, redemptions from Korea Bond Funds hit their highest level since early 1Q21 as the potential date for inclusion in the FTSE Russell World Government Bond Index slips into the middle of next year.

Asia Pacific Bond Funds bounced back from the previous week when collective outflows exceeded $400 million as redemptions from New Zealand, Hong Kong, Singapore and Australia Bond Funds hit 10, 14, 101 and 285-week highs respectively.

 

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