EPFR-tracked Emerging Markets Equity Funds group posts its biggest quarterly outflow since Q3 2015, losing over $35 bn
Trade tensions are likely to persist in Q4 and central banks may remain dovish, say analysts
The third quarter of 2019 clearly belonged to safe-haven assets: Bonds. A slew of uncertainties, especially related to global growth, with fears of a recession looming large, kept investors away from the riskier asset class: Equities.
“The third quarter ended as it began, with EPFR-tracked equity funds experiencing net redemptions and bond funds net inflows that took their year-to-date totals to -$230 billion and +$481 billion, respectively, as investors continue to brace for a cyclical downturn that they have been anticipating for the better part of four years. In recent months, their outlook has been shared by the world’s major central banks," fund-tracker EPFR Global said in a report on 3 October.
In a bid to combat the global economic slowdown, leading central banks have gone on a monetary easing spree in recent months. Since the beginning of July, the US Federal Reserve has cut interest rates twice and is expected to cut them yet again at the end of this month. The European Central Bank (ECB), which is faced with a sharp slowdown in the German economy, has restarted quantitative easing.
Back home, the Reserve Bank of India (RBI) reduced the repo rate yet again by another 25 basis points to a nine-year low of 5.15%. A basis point is one-hundredth of a percentage point. This is RBI’s fifth rate cut since February 2019. It has hinted towards more easing, if needed, to boost the sagging domestic economy.
Provisional numbers for the third quarter suggest that EPFR-tracked Emerging Markets Equity Funds group collectively recorded its biggest quarterly outflow since Q3 2015, losing over $35 billion. “EPFR-tracked Developed Markets Equity Funds ended the quarter by posting their second straight collective outflow and 9th in the past 13 weeks, with redemptions from US and Europe Equity Funds offsetting flows into Global, Japan and Australia Equity Funds," said the report.
According to Mark Haefele, chief investment officer at UBS Global Wealth Management, trade tensions are likely to persist in Q4 and central banks may remain dovish. “The Fed cut rates twice in 3Q, while the ECB reduced rates and is to resume bond purchases. Markets are now pricing in negative ECB rates for more than a decade to come. But while risk-free yields are low or negative, we see opportunities for investors in US dollar-denominated emerging market sovereign bonds, and select high-yielding emerging market currencies," Haefele said in his weekly blog.
On the other hand, research house Julius Baer anticipates equities to make a comeback in its Q4 2019 outlook report. Meaningful interest rate cuts in the face of excessive investor pessimism tend to be followed by the outperformance of riskier assets, particularly if they help to ignite growth, it said.