FYI | Sep 05 2008
By Chris Shaw
State Street Global Markets notes fund flows in the past month have shown a distinct preference for equity markets in the US and the UK, which are the largest component markets of the MSCI World Index, rather than keeping money in emerging market opportunities.
In a sense this is not unusual as State Street points out a large portion of the world’s money is managed by operators in these two markets, with 46% of the US$49 trillion in professionally managed assets around the world run out of the US and 11% managed in the UK.
This flow of funds has helped the relative performance of markets in these two countries, as since July 2nd State Street notes the S&P500 has risen 1% and the FTSE100 1.8%, clearly outperforming the MSCI Emerging Markets Index at minus 14% and the MSCI Eafe Index at minus 7.5% over the same time period.
At the same time as funds have been returning to bigger markets the group notes there has also been a change in sector allocations, with energy stocks seeing selling since mid-June and materials company exposures coming under pressure from early July.
This has coincided with the sell-off in commodities generally, with the Reuters-Jeffries CRB Index down 17% from its peak. The group’s analysis shows the money from these commodity related exposures has gone principally into financial stocks, while the traditionally defensive healthcare sector has also been a beneficiary of increased inflows.
In the group’s view professional investors are unlikely to turn too optimistic on the market’s outlook until at least the fourth quarter, as the poor market performance in recent months is producing something of a collapse in terms of retail fund flows into mutual funds.
This it notes is forcing fund managers to at least run with higher levels of cash in their portfolios to allow for redemptions and with further redemptions likely at the end of September a move to lift equity weightings in the next few weeks appears unlikely.
Looking further ahead State Street takes the view the fact there has been some modest buying in both the UK and US means either investors are wanting the comfort of having money in their home markets, or that investors are actually seeing through the current conditions and forming the expectation it will be these two markets that are the first to recover when conditions eventually improve.
