(August 6, 2012) — Investors have been rushing into risker asset classes as politicians’ new measures to solve the global financial crisis look set to drive down returns on any remotely safe investment.
Last week, emerging market equity funds posted their biggest inflow since mid-February, figures from data monitor EPFR showed. Commodity sector funds broke a five-week outflow streak and Russian equity funds enjoyed their second best week year-to-date, the company said.
This movement was a reaction to announcements made by the heads of central banks in Europe and the US, that they were prepared to help struggling economies manage their economic problems. This translated to investors as reducing the cost of credit, which would in turn force down the returns on investments for investors in line with the perceived safety of the asset class.
Investors have suffered at the hands of the financial crisis – and the attempts to resolve it – as equity returns have most often been inconsistent, with a tendency for gains to be wiped out. Fears of default have pushed investors into the highest quality sovereign bonds, which has led to some countries offering negative yields to their creditors.
Additionally, investors whose liabilities are measured using these interest rates have suffered a double-whammy of seeing these future payment obligations rise.
Figures from custodian BNY Mellon Asset Servicing last week showed UK pension funds investing in North American equity funds lost 3.4% over the last quarter. European equities – not including the UK – lost 7.2% over the three months.
Alan Wilcock, performance and risk analytics manager at BNY Mellon Asset Servicing, said: “The poor performance of Europe’s equities is no surprise, given re-emerging concerns about the financial health of Europe’s sovereigns in the second quarter. This, coupled with economic fragility in the US and China, stoked widespread volatility and in turn impacted investor confidence and equity performance.”
However, this hunt for yield may not be long-lived as regulators’ actions continue to disappoint.
“Since neither meeting gave the markets what they are looking for there’s a good chance this week’s inflows will reverse themselves, especially on the equity side where most of the money went into ETFs,” said EPFR global research director Cameron Brandt.