In terms of global investment flows during 2010, three fund types have been clear winners. These are developed market mutual bond funds, emerging market mutual bond funds and emerging market mutual equity funds. The big losers have been developed market money market funds as well as developed market mutual equity funds.
In total, almost $80 billion year-to-date has gone into emerging market mutual fixed income and equity funds. This has been driven by extremely low global yields and some recovery of risk appetite. In contrast investors have withdrawn a massive $373 billion from US money market mutual funds this year, following a withdrawal of $466 billion last year. US equity mutual funds continue to see outflows, whereas inflows into US bonds mutual funds are up around $300 billion since the beginning of 2009.
South Africa has received its share of the investment flows into emerging markets. Year-to-date foreign inflows into the SA bond and equity markets are around a total of R100 billion, with R70 billion flowing into the bond market (this is a record for any year). It is therefore no surprise that the local bond market has outperformed the local equity market and that the Rand has strengthened. Year-to-date the Rand has appreciated by 4% against the US Dollar. Interestingly, unlike in 2009 when the Rand was the second best performing emerging market currency or in 2008 when the Rand was the worst performing emerging market currency, the Rand has performed in line with many other emerging market currencies this year.
On a global scale, developed market mutual fund investors have made two big investment decisions over the past 18 months to 2 years. The first has been to significantly reduce their exposure to money market funds, mainly due to the exceedingly low returns at the short-end of the yield curve and therefore rotating much of that money into higher yielding bond funds. The second has been to significantly increase their exposure to emerging markets. Both these decisions have been extremely successful.
Given the current general economic expectations; that short-term rates will remain low for an extended period on a global scale, that global inflation is well under control and that economic growth will be modest and below trend, the current investment themes remain sound. However, any material change to these assumptions will most likely influence the global appetite for risk (either positively or negatively), precipitating a potentially significant change in investment flows.
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