The world’s best performing market sees outflows

As capital flows go, the week that ended on April 8 brought a paradox: the world’s best performing market over the past 12 months saw money flowing out, rather than in.

China equity funds recorded their eighth straight week of outflows, despite Chinese equities’ stellar performance.

The Shanghai Composite gained 25% year to date and a whopping 95% in a year, boosted by a regulatory decision last November to make investment by foreigners in mainland China easier and to allow the Chinese to put more money in stocks listed in Hong Kong.

The fact that there were outflows rather than inflows after such good performance is part of a wider disconnect between emerging market assets’ performance and capital flows, according to analysts at Bank of America Merrill Lynch.

Emerging Markets Flows vs Performance

Emerging markets saw outflows despite improving performance. Source: Bank of America Merrill Lynch.

Emerging market equities saw $1.1 billion worth of outflows in the week that ended of April 8, which was their sixth straight week of outflows.

An earlier investors’ survey saw hedge funds turning outright bearish on emerging markets.

China saw $2.3 billion in outflows, while only $17 million went into Brazil, despite the IBOV index rallying more than 11.5% in the past month.

In fixed income, the same trend can be observed for emerging markets: inflows were tiny, at $400 million. But at least it was the asset class’ third straight week of inflows.

Investment grade bond funds have enjoyed inflows for 68 weeks in a row, with another $3.6 billion entering the asset class last week.

High-yield bond funds, albeit shaken in the past year by the prospect of the Federal Reserve beginning to raise interest rates, saw their largest inflows in the past five weeks, of $2.1 billion.

These may have been driven by investors’ hopes that the Fed will remain dovish following weaker than anticipated nonfarm payrolls data for March.

Europe remains “the crowded trade” as the analysts at Bank of America Merrill Lynch call it. European equity funds saw their 13th straight week of inflows, with $3.9 billion going into the asset class.

US stocks, by contrast, saw another $5.5 billion going out, with the asset class recording outflows in seven out of the past eight weeks.

A relatively modest $300 million went into Japanese stocks, which saw seven straight weeks of inflows.