Demand for risk assets tumbles ahead of fiscal cliff talks: EPFR

NEW YORK Fri Nov 16, 2012 2:52pm EST

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NEW YORK (Reuters) - Investors shunned stock funds and fled from high-yield bond portfolios in the latest week as fears over the "fiscal cliff" of U.S. tax hikes and spending cuts roiled sentiment, data from EPFR Global showed on Friday.

Stock funds worldwide lost $6.41 billion to outflows in the week ended November 14, the most since the week ended September 5 and reversing net inflows of $1.12 billion the previous week, according to the fund-tracking firm.

U.S. stock funds alone had outflows of $7.05 billion over the reporting period, while inflows of $589 million into emerging market stock funds were the least in eight weeks.

The appetite, or lack thereof, for equities serves as an important barometer of investor confidence and how people feel about the state of economic growth.

Negotiations over the "fiscal cliff", which could take about $600 billion out of the U.S. economy and potentially cause a recession early next year if it is not properly addressed, began on Friday as U.S. President Barack Obama met with top U.S. lawmakers in Washington.

"If these spending cuts, which automatically kick in if they don't reach a conclusion, take effect, then we're looking at some major hits to GDP, and that's why the market's scared," said Troy Ludgood, senior portfolio manager at Wells Capital Management.

Bond funds worldwide also showed weaker demand with inflows of $5.29 billion after attracting a record high of $9.97 billion in new cash the previous week.

Investors were bearish toward risk assets and took $957 million out of high-yield "junk" bond funds globally, the most taken out of the funds in 23 weeks. U.S.-based high-yield bond funds alone suffered outflows of $1.2 billion.

Investors fear that high-yield bonds could default if the U.S. hits the fiscal cliff and winds up in recession, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Ludgood of Wells Capital said that weak growth forecasts for companies such as McDonald's and Caterpillar Inc. have also weighed on demand for high-yield bonds.

Funds that hold high-yield bonds have attracted record inflows of over $70 billion this year as investors have sought income amid the low interest-rate environment in the U.S.

The benchmark S&P 500 index fell 2.8 percent over the reporting period as concerns mounted over the ability of U.S. policymakers to resolve the "fiscal cliff."

U.S. President Obama reiterated his push to have wealthy Americans pay more taxes in his first press conference since winning re-election on November 6. The comments followed days after John Boehner, House Speaker and top Republican in Congress, voiced his opposition to the tax hikes.

The yield on the benchmark U.S. 10-year Treasury fell to 1.59 percent on Wednesday as investors sought the safe-haven bond amid the policy uncertainty. Demand grew even further on Friday, with the yield touching 1.5724 percent in intraday trading.

"We don't know what exactly the consequences of the fiscal cliff will be," said Esiner of Commonwealth Foreign Exchange.

New demand for intermediate-term bond funds, which mostly hold government and corporate bonds according to EPFR Global, stood out as the funds raked in $2.59 billion in inflows.

Emerging market bond funds, meanwhile, attracted just $634 million in inflows, falling short of their weekly average of about $1 billion this year.

Funds that hold European bonds attracted $432 million in inflows, roughly half the amount they pulled in the previous week. Delays to an installment of Greek aid to pay off the country's debt led to uncertainty after the Greek parliament passed a tough 2013 austerity budget.

While much of the euro zone remains under pressure, the bonds of European countries that run current account surpluses such as Sweden, Slovakia, and the Netherlands remain attractive options, said Ludgood of Wells Capital.

(Reporting by Sam Forgione; editing by Andrew Hay)

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