This year started like 2014 finished when it comes to capital flows. Money flew out of risky assets such as high-yield debt and equities, and into the safety of high grade – or investment-grade rated – bonds.
Capital flight to safety looks set to continue this year. Source: Bank of America Merrill Lynch.
European-domiciled high-yield debt funds saw outflows of $1.2 billion in the first week of 2015, which ended on January 7, a report by Bank of America Merrill Lynch shows.
For high-grade credit funds, the first week of 2015 marked the 55th consecutive week of inflows, with $734 million pouring into the asset class.
Looking at currencies, investment-grade credit funds in sterling actually saw outflows equivalent to $200 million, while funds denominated in euros and dollars both saw inflows.
Strategists have warned that a period of high volatility is starting for UK assets as the election approaches and political bickering intensifies.
In developed markets, developed Europe and North America recorded “healthy inflows” of 0.20% of assets under management (AUM) in the first week of the year, according to analysis by RBS.
Equity funds in developed markets recorded negative flows of 0.17% of AUM, with outflows from North America totalling 0.29% of AUM.
In emerging markets, fixed income saw outflows for the fifth week in a row, the longest period of uninterrupted outflows since March 2014. The cumulative outflow totalled 2.17% of AUM, the RBS analysis shows.
Hard currency funds in emerging markets were in the red for the sixth consecutive week, with 3.15% of AUM flowing out, while local currency funds actually recorded a slight inflow of 0.01%.
Looking at countries, allocations to emerging markets fixed income show capital going into Turkey and South Africa and out of Russia, most likely due to the fact that Turkey and South Africa are seen as benefiting from low oil prices while Russia suffers.
The outflow of capital from Russia is also due to the continuing tensions with Ukraine. A meeting of leaders from Germany, France, Russia and Ukraine is scheduled for January 15, but there are still doubts that the conflict will be scaled down.
Equity funds in emerging markets saw outflows of 0.10% of AUM. For Latin America it was the 10th week of outflows, with a cumulative 3.38% of AUM.
For emerging Europe it was the sixth week of outflows, which totalled 1.74% of AUM.
For emerging Asian equities it was the seventh week in which capital flowed out, totalling 1.59% of AUM.