Developed markets still have the edge in both equities and bonds. Can emerging markets find favour again? Cherry Reynard reports
At the end of 2013, there was relatively little focus on how the end of quantitative easing (QE) might affect the developed world but a lot of concern about its impact on emerging markets. Investors worried that constraining global liquidity may negatively impact developing countries and continued to desert emerging market funds in their droves. The notable exception was China, where investors started to believe the economy may be turning a corner.
Data from EPFR Global showed investors returned to dedicated China equity funds during the final days of the year. These funds took more than $1.5bn in new money across the last ten working days of 2013, as investors grew more convinced in the sustainability of economic growth in the world's second largest economy.
But the wider global emerging markets sector continued to see outflows, as it had done for most of the year. This is in stark contrast to the four major developed market equity fund groups – US, Europe, Japan and global – which looked set to show record global inflows for 2013. In the week before Christmas, investors poured $2.6bn into equity funds worldwide but withdrew $1.3bn from emerging markets. Japanese equity funds were particularly popular, drawing $202m in new cash.
Where did the smart money go in December?
Equity funds gained in popularity in Europe too, with inflows of €8.42bn, according to Morningstar. Again, however, inflows were largely confined to developed markets. Europe Large-Cap Blend saw the strongest inflows at €1.7bn. Japan also had a strong month, gathering €1.6bn in assets. Global Equity Income and Global Large-Cap Value did well as well.
On the negative side, UK Equity Income saw significant outflows, largely prompted by switches out of Neil Woodford's Invesco Perpetual Income and High Income funds ahead of his departure in April this year. Asia-Pacific ex Japan equities were also in negative territory for the month.
Overall, bonds saw outflows of €2.1bn but this masked a more nuanced picture. US high yield bonds and USD corporate bonds continued to see buoyant demand, drawing €1.5bn and £1.35bn in assets respectively. European high yield bonds also had a good month. However, money fell away from emerging market bonds, which saw the biggest outflows of all asset classes at €3.1bn. Diversified and flexible bonds funds also fared badly, suggesting investors want to focus their attentions solely on credit. This was reflected in outflows from the Templeton Global Bond fund, which shed more than €1bn during the month, despite outperforming its sector.
In the UK, investors were a little more forgiving of emerging markets. The US was the only equity sector to see outflows (£63m) as investors fretted about valuations. Overall, equities remained the bestselling asset class for the eighth consecutive month, with net retail sales of £935m. This strength was driven by strong sales of UK and European equity funds, with net retail sales of £409m and £240m respectively. Japanese equity funds saw their highest net retail sales since February 2011 at £117m.
Net retail sales for property funds remained strong at £212m in November but bonds did not find favour with UK investors: the worst-selling IMA sector was Sterling Corporate Bond, with a net retail outflow of £149m.
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