Bond funds shine as global investors continue to shun 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 global economic slowdown, major central banks have been on a monetary easing spree in the recent months. Since the beginning of July the US Federal Reserve has cut interest rates twice and is expected to cut rates again at the end of this month. European Central Bank (ECB), which is faced with a sharp slowdown in the German economy, has restarted the quantitative easing program.

Back home, the Reserve Bank of India (RBI) reduced repo rate yet again by another 25 basis points to nine-year low of 5.15%. One basis point is one hundredth of a percentage point. This is RBI’s fifth rate cut since February 2019 and the central bank has hinted towards more easing to boost India's sagging economy.

Provisional numbers for the third quarter suggest that EPFR-tracked Emerging Markets Equity Funds group collectively recorded its biggest quarterly outflow since third quarter of 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 AG, trade tensions are likely to persist in the fourth quarter and central banks to 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," he said in his latest weekly blog.