Fund investors still chose EM debt exposure as their preferred risk play, but became more discerned on credit funds over the past week. In a shift to quality, investment-grade bond funds hit 17-week high inflows while high-yield funds suffered their first redemption since June, the latter burdened by low oil prices and slightly receding risk appetite. In the IG space, European funds gained 2.5-year high inflows in the past week and UK funds in particular have experienced a very notable investor interest over the past few weeks – a position which now seems reassured with the BoE’s announcement of a corporate bond purchasing scheme.
Last week, EM surprises turned positive for the first time since June which – paired with the weak Q2 GDP number out of the US (but before the strong nonfarm payrolls last Friday) – led the market to put aside their worries of a hawkish Fed re-pricing. As such, EM equity funds sustained inflows for a fifth week but investors again showed selective tastes for risk exposure, preferring diversified GEM mandates over regional EM mandates (see top right chart). Overall, a combination of weak economic data releases (as of last Wednesday’s close) and an underwhelming stimulus package in Japan, put a more defensive flavour to flows compared to the week prior, with investors withdrawing from DM equities while topping up money market exposure.