Investors turn cold on U.S. stocks as budget talks stagger-EPFR

NEW YORK Fri Dec 7, 2012 3:56pm EST

NEW YORK Dec 7 (Reuters) - Investors exited U.S. stock funds after delving in the previous week and rotated into non-U.S. stocks and high-yield bonds as U.S. lawmakers' talks over a U.S. budget deal faltered, data from EPFR Global showed on Friday.

Funds that hold U.S. stocks suffered outflows of $2.41 billion in the week ended Dec. 5 after gaining $10.52 billion in new money the previous week, which was the most in roughly 16 months, according to the fund-tracking firm.

Stock funds worldwide attracted inflows of $2.3 billion, a meager sum compared to massive inflows of $14.86 billion the previous week.

Some investors are exiting U.S. stock funds and taking profits on uncertainty over a deal surrounding the "fiscal cliff" of tax hikes and spending cuts in the U.S. and in anticipation of increases in capital gains, said Douglas Gordon, senior investment strategist for North America at Russell Investments.

"What markets really need to feel is that there's confidence that a deal will get done in the early portion of 2013," Gordon said.

Investors opted for non-U.S. stocks and pumped $3.32 billion into emerging market stock funds - the most in 10 weeks - and $1.2 billion into European stock funds, the most in 11 weeks according to the fund-tracker.

Gordon of Russell Investments said that emerging market stocks are "modestly attractive" in value, especially given the potential for China to improve its slowing growth.

Sentiment toward bond funds, meanwhile, was largely unchanged from the previous week as investors gave $4.46 billion to the funds worldwide, with U.S. bond funds accounting for $2.06 billion of that total.

Investors took some risk in high-yield "junk" bond funds, which attracted inflows of $1.73 billion, the most in 11 weeks according to EPFR Global.

The benchmark S&P 500 index fell 0.33 percent over the reporting period as President Barack Obama and Congress remained at loggerheads over how to resolve the looming "fisal cliff" of $600 billion in tax increases and spending cuts.

During the week, U.S. House Speaker John Boehner noted the lack of progress in the talks, while President Obama said the Republican proposal to solve the crisis was "out of balance."

On Wednesday, Obama predicted a deal could be reached within a week if his opponents could compromise on raising taxes for Americans who make more than $250,000 a year. If lawmakers don't act, the tax increases and spending cuts set to occur early next year could tip the U.S. into recession.

The yield on the safe-haven U.S. Treasury touched 1.59 percent on Wednesday, with some citing uncertainty over the budget talks. The yield rose to 1.6267 percent in intraday trading Friday after data showed that U.S. non-farm employment increased by 146,000 jobs last month.

Shifting away from the U.S. crisis, investors also sought value in emerging market bonds and committed $1.02 billion to funds that hold them.

Flows into emerging market bond funds have been "on fire" this year and should continue given low rates on U.S. Treasuries and pessimism toward stocks as a result of the European debt crisis, the U.S.' debt issues, and China's slowdown, said Robert Abad, portfolio manager at Western Asset Management.