Flows into EPFR-tracked Emerging Markets Equity Funds during the third week of January climbed to their highest level since mid-1Q21 as investors positioned themselves for China’s much anticipated economic rebound and, the anti-inflation rhetoric of the Federal Reserve and European Central Bank (ECB) notwithstanding, an early end to the current interest rate cycles in the US and Europe. Investors also steered $2.5 billion – a 101-week high – into Emerging Markets Bond Funds.
Over $110 billion – a 131-week high – flowed into EPFR-tracked Money Market Funds during the week ending Jan. 4 as investors surveyed an investment landscape still being reshaped by inflation, tighter monetary policy and geopolitical forces.
The final week of 2022 saw EPFR-tracked Bond Funds post consecutive weekly outflows for the first time since mid-October, capping a year when the overall group smashed its previous outflow record as central banks scrambled to contain inflation running at multi-decade highs.
Behind the headline number, however, was a marked shift from active to passive management.
Overall, the second week of December 2022 saw all Equity Funds record a collective inflow of $17.9 billion while Bond Funds absorbed $2.3 billion.
With the European Central Bank meeting the day after the latest reporting period and US Federal Reserve policymakers convening five days later, flows to EPFR-tracked fund groups were predictably subdued in early June. Investors opted for liquidity, with flows into Money Market Funds hitting a nine-week high, while steering clear of most fund groups tied to European and emerging markets assets.
The first week of May ended with the US Federal Reserve raising its key interest rate by 50 basis points. Investors, who expected a hike of that magnitude but feared the Fed might opt for a 0.75% increase, spent most of the week taking defensive positions. They cut their exposure to emerging markets and high yield debt, technology stocks, alternative assets and real estate. Europe Equity and Bond Funds also experienced significant redemptions as Russia’s invasion of Ukraine grinds into its 12th week.
The second week of February was another bumpy one for financial markets as Russian sabers rattled along the Ukrainian border, the price of a barrel of West Texas Intermediate crude oil hit $95 a barrel for the first time since 3Q14 and some US Federal Reserve policymakers talked of a 50 basis point hike in March. Fund flows reflected the uncertainty, with flows into all EPFR-tracked Equity Funds falling to less than a twentieth of the previous week’s total and redemptions from Bond Funds climbing again to a 49-week high.
Flows into Equity Funds jumped to a 21-week high during the first week of February, with over $35 billion committed to US Equity Funds, as investors responded to the cheaper valuations on offer after January’s sell-off. But the fear that the Federal Reserve could hike rates at each of their remaining 2022 policy meetings, which triggered the recent declines in US equity markets, continued to chill appetite for bonds. The Bond Funds tracked by EPFR posted their fifth consecutive outflow, a run that has seen over $35 billion redeemed since the second week of January.
When it came to driving money in and out of mutual funds during the third week of January, the possibility that the US Federal Reserve could hike interest rates sooner and higher had a bigger impact than the prospect Russia will take military action against the Ukraine.
Hopes that the impact of Covid’s Omicron variant will prove transitory, concern that it will not, and fears that inflation is here to stay whip-sawed global markets during the final days of November. Concerns about the latter issue were crystalized by recently reappointed US Federal Reserve Chair Jerome Powell’s admission that price pressures could spur the Fed to accelerate the tapering of its asset purchases.