Troubled Markets Cast Doubt on Re-risk Timing

Investors piled back into return-seeking assets, but was it too much too soon?

(March 28, 2012) —  Record outflows from government bond funds last week showed investors were ready to take on more risk, but further unsettlement and disappointing economic figures this week could indicate they have moved too soon.

At $1.01 billion, outflows from United States long term government bond funds were the biggest on record last week, according to market monitor EPFR, and investors pulled over $13 billion from US Money Market Funds, the company said.

Elsewhere in fixed-income, investors were turning against low yielding assets, EPFR said, citing commitments to bond funds as the smallest since the first week of the year.

EPFR said: “The search for undervalued stocks did see retail investors commit money to Europe Equity Funds for the first time since mid-2Q11 while dividend equity funds posted inflows for the 62nd time in the 64 weeks since the beginning of 2011.”

However, investors may have moved too soon.

This morning the Office of National Statistics in the United Kingdom revised down its estimate for the country’s growth for the last three months of last year, from a negative 0.2% to a negative 0.3%, with most of the downward revision being made to household and government expenditure, while the contribution from inventories was increased.

Azad Zangana, European Economist at Schroders, said the figures for the first quarter of the year were also revised down by 0.2%, with the second three months revised down by 0.1%, which means the economy contracted in the second quarter of last year where it had previously thought to have been flat.

Zangana said: “The latest GDP data is significantly worse than expected and shows weaker momentum heading into 2012. Growth for 2011 as a whole is now 0.7% rather than the previous estimate of 0.9%. Our view is that the weakness highlighted in this release in combination with the poor production and retail sales data so far for, it is more likely than not that the economy also contracted in the first three months of this year, which would put the UK in a technical recession.”

Elsewhere, European markets were abuzz with rumours of a potential Spanish bailout as the country continued to struggle with its debt and poor growth projection.

Spanish Prime Minister Mariano Rajoy told reporters in South Korea that Spanish ministries will be required to cut their budgets by 14-15% as part of the new set of austerity measures that are to be set out at the end of the week.

Further north, politicians in the Netherlands, which had been one of the stronger economies in the Eurozone, admitted this week that it was struggling to agree how to slash its national deficit. The country received an unfortunate double-whammy as analysts at investment bank Citi said it should no longer be classed as a ‘core’ nation to the beleaguered Eurozone.