How Much More ‘Risk Off’ Can Investors Get?

(May 30, 2012)  —  Investors have turned to money market and ‘safe haven’ regional funds in an attempt to stem losses as interminable discussions over saving the Eurozone drag global economies further into the mire and emerging market growth continues to be questioned.

Last week saw the greatest outflows from high yield bond funds in nine months, according to data monitor EPFR. Investors withdrew over $3 billion from the range of these relatively risky debt funds – the highest amount since global markets nose-dived in August last year.

Emerging markets equity, commodities and energy sector funds and European equity funds all experienced redemptions in excess of $1 billion, EPFR said.

Money was instead channelled into funds that were perceived as ‘safe havens’ as investors sensed efforts to avoid a Greek exit from the Eurozone were failing and Chinese growth prospects weighed heavy.

Money market funds picked up a net $11.5 billion, while Japanese equity funds took in $1.23 billion, the biggest weekly inflow to the country since the last quarter of 2005.

“Most of that money went into a handful of Japanese domiciled ETFs,” EPFR Global Research Director Cameron Brandt said, “which raises the possibility that the Bank of Japan is again supporting domestic equities by way of ETF purchases. That said, the numbers also suggest that Japan’s relatively aggressive commitment to economic and monetary stimulus is attracting the attention of investors looking for alternatives to Europe”.

Flows into bond funds lost momentum over last week as safe haven flows pushed United States and German debt prices to even richer levels and investors pulled back from some of the riskier fixed-income asset classes.

“Comparisons are already being drawn to last August’s sell-off,” said Brandt. “But, for the moment, redemptions are not of the magnitude we saw then. In addition to the Eurozone’s troubles, investors nine months ago were digesting the US ratings downgrade, stubbornly high oil prices tied to widespread turmoil in the Middle East, serious talk of a pre-emptive strike on Iran’s nuclear facilities and the aftermath of Japan’s trial by earthquake and tsunami.”

In the Eurozone all eyes remain on Greece and its upcoming election on June 17 after the last round of voting failed to gather enough support for an outright winner and no party was able to form a workable coalition. Last week, investment bank Citi predicted Greece would exit the European single currency by January next year.

Concern over Spain has also continued to mount as one of its major banks had to be rescued by the government, barely a year after floating on the domestic exchange. However, rumours emerged that plans to recapitalise Bankia had been rejected by the European Central Bank, throwing the country’s economic climate into further disarray.