Europe's fund industry has been reeling from investors' change in sentiment in the past three months. Since the Federal Reserve laid out its timetable for the tapering of bond buying (commonly known as QE3) at the end of May, investors have embarked on a selling spree, redeeming long-term funds on a substantial scale.
In August alone, the European fund industry was hit with outflows from long-term funds to the tune of EUR 2.1 billion. Bond funds suffered most with investors withdrawing EUR 7.9 billion. Equity funds saw net redemptions of EUR 683 million. Demand for allocation funds was solid at EUR 4.3 billion, as were inflows into alternative funds that pursue hedge fund-like strategies. Net inflows into this latter asset class slowed to EUR 1.4 billion in August.
While long-term funds suffered outflows in August, money market funds profited from the ‘risk-off’ mode, enjoying net inflows of EUR 7.9 billion after seeing net redemptions for four months running. Due to practically non-existent returns, these short-term products have seen outflows of EUR 23.3 billion so far in 2013 and EUR 45.5 billion in the past 12 months.
The rise in 10-year US Treasuries from well below 2% in May to close to 3% in early September has made bond fund investors nervous about the further potential for rates to rise, prompting a sell-off of USD- and EUR-denominated bond funds. The effects of such a shift have taken their toll on US asset managers in particular, most prominently PIMCO.
A less clear-cut consequence has been the rapid deterioration of sentiment surrounding emerging-markets bonds and equities, which had previously profited from massive capital flows brought about by the glut of cheap money available. The prospects for monetary tightening and higher US interest rates have presented investors with further arguments in favour of selling emerging-markets assets.
It remains to be seen if the refusal of the Federal Reserve earlier this month to slow down asset purchases will bring about a more relaxed view in investors’ minds or more nervous fingers going forward. As the central banks of several emerging countries—among them Brazil, Indonesia and India—rushed to protect their ailing currencies by raising short-term lending rates, emerging-market pessimists could arguably find further risks that would impact economic growth in developing markets.
