Global equity funds attracted the largest inflows in the week ending September 18, since at least 2005, according to Bloomberg’s article by Weiyi Lim. Investors flocked to these funds after the Federal Reserve announced that monetary stimulus will be maintained on September 18.
According to Wei Liang Chang, a foreign-exchange strategist at Australia and New Zealand Banking Group (ASX:ANZ), global equity funds attracted a net $25.9 billion in new investments for the week ending in September 18. Developed markets posted $24.3 billion of inflows and emerging markets drew $1.6 billion of new investments, according to Chang.
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The MSCI World reached its highest level since 2008 on September 16 after Larry Summers withdrew his candidacy to become the next Federal Reserve chairman easing market concerns about potential monetary tightening. The index continued to rise after current Federal Reserve chairman Ben Bernanke announced unexpectedly that there will be no reduction of the $85 billion per month bond purchase program on September 18.
More equity fund inflows expected
Wellian Wiranto, an investment strategist at Barclays PLC (NYSE:BCS) (LON:BARC), thinks further inflows into global equity funds are possible as investor confidence rises in light of no imminent tapering. John Rekenthaler of Morningstar agrees with Wiranto’s assessment, and he is bullish over the long-term stock market prospects. However, Rekenthaler worries about entering U.S. stock funds now as such funds have been the best performers over the last three years. He thinks that U.S. stock funds may correct temporarily and fears that investors could be hit with losses shortly after buying U.S. stock funds.
U.S. Federal Reserve tapering possible in October
Federal Reserve chairman Ben Bernanke signaled on May 22 that policymakers may slow down bond purchases, which triggered capital outflows in emerging market equity funds and a month long selloff in global equities. According to EPFR Global, there were more than $50 billion in outflows from funds that invested in developed markets stocks and bonds. On September 18, Bernanke announced that a decision to reduce bond purchases by the Federal Reserve will depend on economic data and that there is no set timetable to start bond purchase reduction.
One of the voters on the September 18 meeting, Federal Reserve Bank of St. Louis President James Bullard, said that a small reduction in bond purchases is possible in October after the Federal Reserve’s narrow decision of maintaining monetary stimulus. Bullard noted that the committee opted for maintaining accommodation due to some weak economic data. Housing and employment gauges coming in prior to the October meeting could show that the economic recovery is more stable, thus making policymakers more comfortable with a small decrease in bond purchases. Bullard also pointed out that core inflation is low, allowing the Federal Reserve more room to wait for economic growth improvement.
Federal Reserve Bank President of Kansas City Esther George was disappointed with the Committee’s decision not to taper bond purchases. George has voted against all six FOMC decisions in 2013 to continue the bond purchasing program, and postulated that the committee missed an opportunity to reduce bond purchases as markets had already priced in such possibility. She affirms that the bond buying program has pushed up long term inflation expectations and has created asset price and economic imbalances.