A surge in oil prices, alarming inflation data, a jump in the US unemployment rate and interest rate hikes in key emerging markets roiled global markets in the second week of June.
Investors retreated from equity funds as financial markets swooned, but inflows continued into Japanese and global stocks and high-yield bonds, according to research by Massachusetts-based Emerging Portfolio Fund Research (EPFR) on Saturday.
The latest shift in zigzagging investor sentiment hit Asia ex-Japan equity funds, which had their worst week since late January, and kept the pressure on Europe equity and global bond funds.
But investors also extended Japan equity funds' winning run, pushed year-to-date flows into global equity funds back into positive territory for the first time since early Q1-2008 and committed more than $1.8 billion (Dh6.6bn) to financial and energy sector funds, it said.
"What continues to stand out in our weekly data is the resilience of the major investment themes despite the uncertain economic environment," said EPFR Global Senior Analyst Cameron Brandt. "Buying on weakness, betting the US economy will rebound faster than its European peers, a renewed interest in Japanese equities, a modest bias towards growth plays and a strong bias at the country level towards commodity producers were again evident this week."
Russia equity funds took in fresh money for the eighth straight week, Middle East and Africa funds posted another week of inflows – their 26th in a row – and cash continued flowing back into Australia equity funds. But China equity funds had their worst week since mid-January and Taiwan equity funds posted outflows for the first time in 20 weeks.
The optimism generated by Q1-2008 productivity growth in the US did not take long to hit a wall in the shape of unemployment data showing the biggest monthly jump in over two decades, EPFR said.
But, while some investors viewed this news through the prism of weaker sales and pricing power hitting corporate bottom lines, others saw the weaker domestic demand it heralds as another reason that the US Federal Reserve may not need to raise rates later this year.
Flows out of US large cap equity funds were nearly offset by inflows in their small and mid cap counterparts, resulting in net outflows for the week ending June 11 of only $275 million.
"Some investors appear to be rotating their Europe exposure to global equity funds, which have a big allocation to the region.
"These funds took in a net $842m for the week, taking year-to-date flows back into positive territory for the first time in 22 weeks," EPFR report said.
But the other diversified fund group geared primarily to developed markets, Pacific equity funds, suffered because of its exposure to emerging Asian markets in the eye of the inflation storm. This fund group, whose collective performance during the week was the worst of any major fund group tracked by EPFR Global, posted outflows for the eighth time in nine weeks year-to-date.
Inflation was again the key driver of sentiment towards Asia, with investors fretting about the combination of social unrest, higher interest rates and weaker public finances triggered by the rapid escalation of food and energy prices. Between June 5 and June 12, monetary authorities in China, India, Indonesia, the Philippines and Vietnam hiked interest rates or bank reserve requirements as higher fuel prices – in many cases tied to cuts in public subsidies – triggered protests in Thailand, India, the Philippines, South Korea, Hong Kong and Malaysia.
EMEA equity funds were again buffered by the fact so many major oil producers lie within their mandates. In addition to Russia equity and Middle East and Africa regional funds, investors committed money to Middle East regional, Africa regional and Saudi Arabia equity funds. But this time that was not enough to offset concerns about markets running big current account deficits such as South Africa, Hungary and the Baltic states.