Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) has released its latest report on the flows of funds around the globe. The report highlights some interesting patterns, the most prominent of which is the flow of capital out of funds investing in equities in the United States and into those that invest in Japanese equities.
As the chart shows capital has been flowing into funds that buy Japanese equities. It should be noted that this report deals almost exclusively with long only funds. The diamonds mark Year To Date Capital Flows, the dark blue bars note weekly flows, and the light blue bars indicate four week moving averages.
On all three counts there is a clear flow of capital away from US equities, and into Japanese equities. For the year to date, capital in Western European funds has declined by 3%, in United States equities funds it has declined by 1.4%. In contrast funds dealing in Japanese equities have seen their assets grow by 9% so far in 2012.
The ongoing European debt crisis is given credit for the flows from Europe, but what is the reasoning behind the movements in Japan and the United States? US equity funds have seen their assets decline by 0.4% in the last week alone, while Japanese funds have seen their assets increase by 0.3%.
The reasoning behind the movements in United States equities is, according to the Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) report, based on the current uncertainty about the country’s budgetary problems. the United States’ government has not shown itself confidently able to rise to the challenge of dealing with the so called fiscal cliff.
The movements are not dramatic however. A 1.4% decline in total assets so far in 2012 is not a “run for the hills” number. The market is adjusting to the possibility that there may not be an adequate solution to the problem. That possibility, small though the market may presently rate it, is enough to cause the recent changes.
If the problem is not solved, the backlash against US equities would be fierce. The recent flows of capital away from the sector is a metric of the unease felt among investors. If a solution proves patent, that capital may well return in the early part of next year, after the current crisis has been subdued.
Japan’s year long performance has been the only significant movement in equities in 2012. Despite Kyle Bass’ predictions, investors appear to be pouring money into funds dealing with Japanese equities.
The reason behind this movement, highlighted by the Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) analysts, is the upcoming election. Shinzo Abe has been rated as the most likely man to become the next leader of Japan. Deutsche Bank is anticipating the result of the election will bring with it a turn toward a looser monetary policy that will benefit the country’s equities.
Whether or not the election turns out the way the analysts expect, and it is almost a month away, polls open on December 16, the market is already preparing itself for the advent of looser money in the East Asian country. Shinzo Abe has advocated the setting of interest rates below zero in order to stimulate lending.
That monetary policy may sound extreme to some, but it is a perfect extension rate that has led Japan into its current fugue. Zero interest rates have not worked, so below zero rates might help the economy.
Finally, the fund flows do not translate into returns. The Nikkei 225 is up 11.04% this year, while the S&P 500 (S&P Indices:.INX) is up 11.65%.