Investors flee into non-U.S. markets as fiscal deal looms-EPFR

NEW YORK Fri Dec 28, 2012 3:41pm EST

NEW YORK Dec 28 (Reuters) - Investors pumped money into funds that hold emerging market and European stocks in the last reporting week of the year as U.S. lawmakers failed to reach a deal on the looming "fiscal cliff," data from EPFR Global showed on Friday.

Emerging market stock funds pulled in $2.16 billion over the reporting period and European stock funds attracted $913 million in the week ended December 26, the fund-tracking firm said, accounting for most of the $3.6 billion into equity funds worldwide.

Investors have strongly favored bond funds over stock funds this year on expectations that the debt securities offer more stable returns in the face of global concerns such as the European debt crisis, the slowdown in China, and the pending tax hikes and spending cuts that threaten to tip the U.S. into recession early next year.

In the last week, however, emerging market and European debt were the winners, as cash flowed into the countries' stock funds as well as $424 million into emerging market bond funds and $343 million into European bond funds. Bond funds altogether pulled in $419 million in new cash over the period, reversing outflows of $4.1 billion the prior week.

Investors grew wary of U.S. securities overall and pulled $149 million out of U.S. stock funds and $495 million out of U.S. bond funds. Retail investors committed money to U.S. stock funds in just two out of 52 weeks this year, EPFR Global said.

Some analysts have said that the unresolved U.S. budget talks have pushed investors out of the U.S. and into emerging markets and Europe.

"As the crisis du jour becomes the U.S. and the obsession over the fiscal cliff, investors have started to warm up to the idea that international markets look attractive," said Chris Konstantinos, director of international portfolio management at RiverFront Investment Group.

The benchmark S&P 500 index fell 1.1 percent over the reporting period as U.S. lawmakers remained in gridlock over how to resolve the looming "fiscal cliff" of tax increases and spending cuts scheduled to occur early next year.

Over the reporting period, U.S. House Republican Speaker John Boehner failed to win support from his party for a proposal that aimed to limit income-tax increases to those earning $1 million or more, complicating negotiations with President Barack Obama, who has sought higher taxes for a larger slice of wealthy taxpayers.

Many investors cited concerns over the stalled talks as a reason for weak retail sales over the period, while weaker-than-expected data on German consumer morale, lowered economic growth figures in Britain, and slashed economic forecasts in Sweden also weighed on sentiment.

U.S. markets closed early following quiet trading on Christmas Eve and remained closed on the Christmas holiday.

Demand for the safe-haven 10-year Treasury rose on Wednesday on concerns over the status of the budget talks, with the yield falling to 1.76 percent. Yields have since fallen to 1.71 percent in intraday trading Friday ahead of another meeting between President Obama and and Democratic and Republican lawmakers.

High-yield "junk" bond funds gained $152 million over the reporting period, reflecting a slightly greater appetite for risk after the funds suffered outflows of $281 million the previous week.

The inflows into high-yield are modest compared to multiple weeks of reported gains in excess of $1 billion this year. Potential federal tax reforms on capital gains under discussion in Washington may be prompting investors to pull back a bit, one investor said.

"Not knowing the tax consequences is going to deter some investors that normally would seek high-yield income," said Alan Lancz, president of Ablan B. Lancz and Associates Inc., an investment advisory firm.

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