By Anette Jönsson 25 September 2008
The share price responds positively to the dilutive sale, raising the question of what the outcome may have been if it - and other recent confidence-building measures - had come much earlier?
The news last night that Goldman Sachs had raised $5 billion from the public share offering it announced after the close of US trading on Tuesday shows investors are confident that this is a Wall Street institution that will survive the current crisis. Goldman sold 40.65 million new shares at $123 apiece, which translates into a discount of only 1.6% to Tuesday's closing price. Even so, it was able to raise twice the amount flagged in the initial announcement.
Investors were likely comforted by the fact that Warren Buffett's Berkshire Hathaway had agreed to invest $5 billion in the company - a move that was announced at the same time as the equity offering. Buffett, a seasoned investor and savvy negotiator, has clearly secured an attractive deal for his investment firm - it is buying perpetual preferred stock with a 10% annual dividend and will receive warrants to acquire another $5 billion worth of stock at a price of $115 per share at any time within the next five years - but even so, the fact that the firm is getting involved is a strong sign of support.
In a written comment, Buffett described Goldman as an "exceptional institution" and went on to say that that it has "an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance". Strong words of praise indeed, although one would hardly expect otherwise from someone who has just forked out $5 billion to buy shares in the company in question.
Goldman's share sale, which includes an over-allotment option of 6.1 million shares that could take the total proceeds to $5.75 billion, also came amid hopes that Congress will pass this week a bill that will enable the creation of the $700 billion bail-out vehicle proposed by Treasury secretary Henry Paulson. The vehicle will be charged with buying toxic assets off the balance sheets of US banks in order to allow them to improve the quality of their overall assets and bring more certainty to the valuation of their holdings. The fund is modelled on the Resolution Trust Corporation that was set up to take over bad loans following the savings and loan crisis in the late 1980s, but details of how it will actually work are still sparse. For example, it is not known at which price the vehicle will buy these illiquid assets from the banks, what types of assets it will buy and whether it will start to sell them off immediately or act primarily as a warehousing facility for the next few years.
The purchase price is a tricky issue because if it is set at what is perceived to be the current "market" price it may result in more write-downs for the banks, causing further losses and potentially a renewed sell-off of financial sector shares. And if the price is perceived to be set above market, the government may be accused of using taxpayers' money to subsidise bank profits.
Until these issues become clear and the bail-out vehicle is actually approved, the financial markets are unlikely to stage a significant and sustainable recovery.
Goldman's share sale was the latest in a series of measures orchestrated by it and Morgan Stanley over the past few days to assure investors they have adequate capital and liquidity to stay in business. The measures, which have been announced at an almost frantic pace, include substantial infusions of capital from third parties - apart from Buffett's investment in Goldman, Morgan Stanley has struck a deal that will see Mitsubishi UFJ Financial Group buy up to 20% of the bank at a maximum cost of ¥900 billion ($8.4 billion). Earlier in the week, the two investment banks also received approval to transform themselves into bank holding companies.
The latter will give them permanent access to liquidity provided by the Federal Reserve and the ability to broaden their funding sources, putting them on an equal footing with the commercial banks. They will even have the ability to set up their own deposit-taking banks under the holding company or indeed buy an existing bank, although it isn't clear whether they will actually take the transformation that far at this point. In return they will come under the supervision of the Fed (and various other bodies) which will mean stricter regulations in certain areas, including the amount of leverage they can take on.
As noted, there are still a number of uncertainties keeping Wall Street on edge but the forceful actions by the two remaining standalone investment banks (or whatever they ought to be called in their new guises) appear to have helped to halt the rapid slide in financial stocks. Sure, the decision by the US Securities and Exchange Commission to ban short-selling of financial stocks at the end of last week (believed to be a temporary measure) can take some of the credit for removing the panic element out of the selling, but the impact of the quick actions taken by Goldman and Morgan Stanley in terms of calming the overall market, should not be underestimated.
However, their performances were mixed over night amid the ongoing wrangling in Congress over the $700 billion bail-out programme. Goldman's share price was up 6% following a 3.5% gain on Tuesday, while Morgan Stanley fell 11.5% after adding 3.4% on Tuesday. The Dow Jones Industrial Average index spent the session hovering both sides of the previous close before finishing down 0.3%.
On the other hand, one could argue that both banks - as well as their industry peers - should have acted much earlier and that the courting of potential strategic investors took place only as they were being pushed ever closer to the edge by events partly out of their control. This means neither bank was able to negotiate a deal out of a position of strength, despite both of them having reported third quarter earnings last week that exceeded expectations.
True, Morgan Stanley did secure a $5 billion investment from China Investment Corporation in December last year, which gave the recently created sovereign wealth fund a stake of up to 9.9%. The investment came as Morgan Stanley announced a $9.4 billion mortgage-related write-down for the fourth-quarter. Since then it has attempted to ride out the storm on its own and Goldman hasn't sought a capital injection from any external parties until this week.
While clearly hypothetical now, the question remains whether the crisis over the past couple of weeks, which has wiped billions of dollars in market capitalisation from the US market as a whole and sent most financial stocks to multi-year lows, could have been avoided had the industry taken more forceful action to boost their capital and remove toxic assets from their books in March when the takeover of Bear Stearns by J.P. Morgan through a Fed-brokered deal was offering real proof of the seriousness of the situation.
It isn't clear whether the lack of more widespread action in terms of securing capital had anything to do with the fact that Bear Stearns was bailed out rather than allowed to go into bankruptcy, but it is certainly not inconceivable that some players got the impression that the Fed would step in as a last resort should any other banks end up in similar trouble.
Earlier this week CLSA's chairman, Rob Morrison, told reporters at the annual CLSA Investors' Forum that a different response from the Fed could well have elicited a more pro-active response from the investment banking industry.
"In my view," Morrison said, "they should have let Bear Stearns go bust as that may have evoked a much quicker response from some of the other investment banks who may then have felt that 'boy, we really do need to sort this out quickly because there is no lifeline from the Fed anymore'."
As it were, the Fed appeared to have little choice but to set the record straight by refusing to do the same for Lehman Brothers, forcing the 158-year old investment bank to file for Chapter 11 two weeks ago. In recent days, Treasury secretary Paulson has said there had been sufficient warnings about the situation at Lehman to allow parties holding Lehman debt and various other instruments issued by it to reduce their exposure, thus there ought to be little systemic risk in allowing market forces to prevail.
In theory perhaps, but in reality the bankruptcy sent ripples through the financial markets and led to an even tighter credit situation which ultimately resulted in the US government having to step in and take over mortgage lenders Freddie Mac and Fannie Mae. The government also extended a lifeline credit facility to insurance giant American International Group to prevent it from going the same way as Lehman (although the terms of the facility were quite onerous). And now, Paulson and Fed chairman Ben Bernanke are ferociously arguing that the $700 billion buy-out emergency vehicle is crucial for putting out what they describe as a fire ripping through the entire financial system.
It is possible that events would have unravelled in much the same way had Bear Stearns been allowed to collapse. Indeed, the fact that Merrill Lynch CEO John Thain was ultimately forced to negotiate a sale of the investment bank to Bank of America despite a series of pro-active capital injections and even a sale of collateralised debt obligations to US private equity firm Lone Star Funds for $6.7 billion, suggests that little could have been done to retain investor confidence and prevent the meltdown of the past couple of weeks.
But we will never know for sure.
Wednesday, September 24, 2008
Petra Energy (RM2.05) - RM1.1bn Shell contract
Petra Perdana : RM1.1bn Shell contract Outperform
Company Update
- Petra Perdana’s 60%-subsidiary Petra Energy announced that it had been awarded a RM1.1bn contract for the hook-up, commissioning and major maintenance services on Shell Sarawak/Sabah offshore platforms. The contract is for a period of four years commencing 23 September 2008. With this latest contract, Petra Energy’s orderbook now stands at RM1.4bn. As a result, our Petra Energy FY08-10 net profit forecasts are raised by 58%, 57% and 121% respectively.
- However, we are concerned about the liquidity crunch in US and Europe caused by bankrupties in the financial services sector that may derail Petra Perdana’s plan to finance its new vessels in FY08-10 via off-balance sheet schemes. While we concur with management that liquidity crunch is less of a concern the oil & gas sector, we believe cost of borrowing (i.e. lease rate) will likely to spiral up given increased yield spread globally. We have thus assumed that the financing cost will be 15% higher than previously arranged US$1/HP/day.
- We have raised our FY08 and FY10 EPS forecasts for Petra Perdana by 13.0% and 4.4% respectively but trimmed our FY09 EPS marginally after factoring in: 1) RM1.1bn contract secured by its 60%-subsidiary Petra Energy; and 2) higher effective interest rate for its new vessel financing. Accordingly, our fair value is trimmed slightly to RM4.64 (from RM4.79/share previously). Reiterate Outperform.-RHB
Company Update
- Petra Perdana’s 60%-subsidiary Petra Energy announced that it had been awarded a RM1.1bn contract for the hook-up, commissioning and major maintenance services on Shell Sarawak/Sabah offshore platforms. The contract is for a period of four years commencing 23 September 2008. With this latest contract, Petra Energy’s orderbook now stands at RM1.4bn. As a result, our Petra Energy FY08-10 net profit forecasts are raised by 58%, 57% and 121% respectively.
- However, we are concerned about the liquidity crunch in US and Europe caused by bankrupties in the financial services sector that may derail Petra Perdana’s plan to finance its new vessels in FY08-10 via off-balance sheet schemes. While we concur with management that liquidity crunch is less of a concern the oil & gas sector, we believe cost of borrowing (i.e. lease rate) will likely to spiral up given increased yield spread globally. We have thus assumed that the financing cost will be 15% higher than previously arranged US$1/HP/day.
- We have raised our FY08 and FY10 EPS forecasts for Petra Perdana by 13.0% and 4.4% respectively but trimmed our FY09 EPS marginally after factoring in: 1) RM1.1bn contract secured by its 60%-subsidiary Petra Energy; and 2) higher effective interest rate for its new vessel financing. Accordingly, our fair value is trimmed slightly to RM4.64 (from RM4.79/share previously). Reiterate Outperform.-RHB
IJM Plantation (RM1.98)- aggressively on forward selling
Top Story : IJM Plantations – Treading Cautiously Now Market Perform
Visit Note
- We garnered five main key takeaways from our recent company visit to IJMP, namely that: (1) IJMP is currently selling forward quite aggressively; (2) FFB production growth is expected to moderate from high single digit in FY09 to low single digits for subsequent two FYs; (3) OER is on declining trend; (4) Cost of production to rise by RM200/tonne in FY09; and (5) updates on IJMP’s Indonesian land planting schedule and plans for its biodiesel plant.
- All in, we revise our forecasts downward by 1-2% p.a. for FY09-10, and by 3.8% for FY11.
- Post-earnings revision, our fair value is RM2.05 (from RM2.10 previously). Despite our negative view on the sector and negative earnings growth projections for IJMP, we believe IJMP’s share price has largely reflected this already, and is more likely to trade in line with the market going forward. In addition, IJMP’s decent gross dividend yields of 5-6% p.a. will help support share price. No change to our Market Perform recommendation.-RHB
Last week support at RM1.58
Visit Note
- We garnered five main key takeaways from our recent company visit to IJMP, namely that: (1) IJMP is currently selling forward quite aggressively; (2) FFB production growth is expected to moderate from high single digit in FY09 to low single digits for subsequent two FYs; (3) OER is on declining trend; (4) Cost of production to rise by RM200/tonne in FY09; and (5) updates on IJMP’s Indonesian land planting schedule and plans for its biodiesel plant.
- All in, we revise our forecasts downward by 1-2% p.a. for FY09-10, and by 3.8% for FY11.
- Post-earnings revision, our fair value is RM2.05 (from RM2.10 previously). Despite our negative view on the sector and negative earnings growth projections for IJMP, we believe IJMP’s share price has largely reflected this already, and is more likely to trade in line with the market going forward. In addition, IJMP’s decent gross dividend yields of 5-6% p.a. will help support share price. No change to our Market Perform recommendation.-RHB
Last week support at RM1.58
Tuesday, September 2, 2008
CTRM- Another sick investment
Only RM25m recovered from investment in US firm
KUALA LUMPUR: After investing RM537.04mil in the US-based Columbia Aircraft Manufacturing Corporation (CAMC) through Composites Technology Research Malaysia Sdn Bhd (CTRM), the Government only managed to get back RM25mil.
The 2007 Auditor-General’s Report stated that CTRM, owned by the Finance Ministry Incorporated and Petronas, invested and lent RM537.04mil to CAMC as of September last year.
CAMC, which produced four-seater light aircraft suffered an accumulated loss of US$132.28mil (RM480.18mil) at the end of 2006 and filed a bankruptcy notice at an Oregon court on Sept 24 last year.
On Nov 27 last year, Cessna, which produces two-seater light aircraft, bought over CAMC for US$16.50mil (RM56.27mil).
The US court then awarded the Finance Ministry of Malaysia loan and interest of US$4.29mil (RM14.63mil) and US$3.04mil (RM10.37mil) to CTRM as payment for debtors in possession.
The A-G's Report said CTRM’s investment failure was due to unscrupulous spending by its senior management officers, CAMC’s board of directors being unable to tackle production of aircraft quickly and the Finance Ministry Incorporated's lack of monitoring of CAMC.
CTRM, set up in 1990 with the aim of expanding into the aerospace and the composite industry, recorded an unusual sum of profit in 2006. The A-G's Report stated that the profit recorded was not generated from its business activities but due to the government’s decision to waive interests on the loan given to CTRM.
From 1999 to 2003, CTRM received government loans amounting to RM362.10mil.
In 2006, CTRM recorded a pre-tax profit of RM191.19mil but in 2005, it suffered losses of RM38.18mil. In 2007, its pre-tax profit was RM1.44mil.
In its reply to points raised in the A-G's Report, it said the profit in 2006 was due to loan restructuring from the Government where interest was waived and CAMC shares, bought with funds from the Government, was transferred back to the Government.
It said pre-tax profit in 2006 without taking into consideration CAMC shares and the interest waiver was RM2.1mil.
KUALA LUMPUR: After investing RM537.04mil in the US-based Columbia Aircraft Manufacturing Corporation (CAMC) through Composites Technology Research Malaysia Sdn Bhd (CTRM), the Government only managed to get back RM25mil.
The 2007 Auditor-General’s Report stated that CTRM, owned by the Finance Ministry Incorporated and Petronas, invested and lent RM537.04mil to CAMC as of September last year.
CAMC, which produced four-seater light aircraft suffered an accumulated loss of US$132.28mil (RM480.18mil) at the end of 2006 and filed a bankruptcy notice at an Oregon court on Sept 24 last year.
On Nov 27 last year, Cessna, which produces two-seater light aircraft, bought over CAMC for US$16.50mil (RM56.27mil).
The US court then awarded the Finance Ministry of Malaysia loan and interest of US$4.29mil (RM14.63mil) and US$3.04mil (RM10.37mil) to CTRM as payment for debtors in possession.
The A-G's Report said CTRM’s investment failure was due to unscrupulous spending by its senior management officers, CAMC’s board of directors being unable to tackle production of aircraft quickly and the Finance Ministry Incorporated's lack of monitoring of CAMC.
CTRM, set up in 1990 with the aim of expanding into the aerospace and the composite industry, recorded an unusual sum of profit in 2006. The A-G's Report stated that the profit recorded was not generated from its business activities but due to the government’s decision to waive interests on the loan given to CTRM.
From 1999 to 2003, CTRM received government loans amounting to RM362.10mil.
In 2006, CTRM recorded a pre-tax profit of RM191.19mil but in 2005, it suffered losses of RM38.18mil. In 2007, its pre-tax profit was RM1.44mil.
In its reply to points raised in the A-G's Report, it said the profit in 2006 was due to loan restructuring from the Government where interest was waived and CAMC shares, bought with funds from the Government, was transferred back to the Government.
It said pre-tax profit in 2006 without taking into consideration CAMC shares and the interest waiver was RM2.1mil.
2Q08 results round-up - Stunningly poor set of numbers
Overall, the Aug results season was a major letdown. The number of
underperformers overwhelmed outperformers by more than a factor of 3. Since
the May results season, 2008 EPS growth has been chopped from 15% to 9%.
2009 EPS growth is unchanged at around 7% but bear in mind the lower base in
2008. There is further downside risk to our earnings forecasts as the 3Q
results in Nov will incorporate a full three months of the higher petrol
prices and the 18-26% electricity tariff hike as well as two rounds of price
increases for building materials. As the fundamental outlook continues to
deteriorate and the political uncertainty shows no sign of ebbing, we are
cutting our KLCI targets from 1,290 to 1,140 points for end-08 and from
1,400 to 1,240 points for end-09. Our target basis has been lowered from
13.2x to 12.2x P/E as we widen the discount to the 3-year moving average P/E
from 10% to 15%. We remain cautious about the outlook and maintain our
NEUTRAL weighting on Malaysia. -CIMB
underperformers overwhelmed outperformers by more than a factor of 3. Since
the May results season, 2008 EPS growth has been chopped from 15% to 9%.
2009 EPS growth is unchanged at around 7% but bear in mind the lower base in
2008. There is further downside risk to our earnings forecasts as the 3Q
results in Nov will incorporate a full three months of the higher petrol
prices and the 18-26% electricity tariff hike as well as two rounds of price
increases for building materials. As the fundamental outlook continues to
deteriorate and the political uncertainty shows no sign of ebbing, we are
cutting our KLCI targets from 1,290 to 1,140 points for end-08 and from
1,400 to 1,240 points for end-09. Our target basis has been lowered from
13.2x to 12.2x P/E as we widen the discount to the 3-year moving average P/E
from 10% to 15%. We remain cautious about the outlook and maintain our
NEUTRAL weighting on Malaysia. -CIMB
2008 Auction Calendar
Highlights:
There are another 11 issuances of MGS and GII (5 of them are private placements) scheduled for the rest of 2008. This works out to about RM2.0b size for each of the remaining auctions.
Stripping out the private placements, the total MGS and GII (which will be issued in 2008) will amount to RM45.7b, slightly lower than the RM48.0b (which we originally expected prior to the announcement of Budget 2009).
While the larger than expected budget deficit for 2008 is expected to push yields higher, the impact will be largely negated by a number of factors. Firstly, by allocating some of the coming government bond issuances to private placements, the government is able to control the net supply of bonds to the market. Secondly, the recent 15 sen cut in petrol prices will help contain the rise in yields.
Therefore, given our view that the OPR will remain unchanged until the end of the year, we think the current sell-off in the bond market will be temporary, and expect yields to start trending downwards in 4Q08. We advise investors to start picking bonds for their portfolio in anticipation of a stronger market later in the year.
For 2009, the total gross issuance of government bonds is expected at RM65.9b. Of the 23 auctions that are scheduled in 2009, we expect 3 of them to be callables with an individual issue size of RM500m, while the remaining 20 auctions should average at RM3.0b each. Again, the large supply of government bonds will exert further pressure on the bond market in 2009. Similar to 2008, we advise investors to keep the duration of their bond portfolios short.
Over in the PDS market, the government plans to compensate toll road concessionaires a total of RM45m a year in return for a 50% cut in toll charges for buses over the next 2 years. We view this to be cash flow neutral and will not have any significant impact on the credit strength of toll operators.
Elsewhere, new PDS issuances next year should see more infrastructure/construction related bonds as the government’s 5 regional growth corridors and the 9MP kick into full swing. The RM35b allocation through 2014 to upgrade public transportation works out to about RM5b a year. As such, we can expect more Prasarana bond issuances in the next few years.
There are another 11 issuances of MGS and GII (5 of them are private placements) scheduled for the rest of 2008. This works out to about RM2.0b size for each of the remaining auctions.
Stripping out the private placements, the total MGS and GII (which will be issued in 2008) will amount to RM45.7b, slightly lower than the RM48.0b (which we originally expected prior to the announcement of Budget 2009).
While the larger than expected budget deficit for 2008 is expected to push yields higher, the impact will be largely negated by a number of factors. Firstly, by allocating some of the coming government bond issuances to private placements, the government is able to control the net supply of bonds to the market. Secondly, the recent 15 sen cut in petrol prices will help contain the rise in yields.
Therefore, given our view that the OPR will remain unchanged until the end of the year, we think the current sell-off in the bond market will be temporary, and expect yields to start trending downwards in 4Q08. We advise investors to start picking bonds for their portfolio in anticipation of a stronger market later in the year.
For 2009, the total gross issuance of government bonds is expected at RM65.9b. Of the 23 auctions that are scheduled in 2009, we expect 3 of them to be callables with an individual issue size of RM500m, while the remaining 20 auctions should average at RM3.0b each. Again, the large supply of government bonds will exert further pressure on the bond market in 2009. Similar to 2008, we advise investors to keep the duration of their bond portfolios short.
Over in the PDS market, the government plans to compensate toll road concessionaires a total of RM45m a year in return for a 50% cut in toll charges for buses over the next 2 years. We view this to be cash flow neutral and will not have any significant impact on the credit strength of toll operators.
Elsewhere, new PDS issuances next year should see more infrastructure/construction related bonds as the government’s 5 regional growth corridors and the 9MP kick into full swing. The RM35b allocation through 2014 to upgrade public transportation works out to about RM5b a year. As such, we can expect more Prasarana bond issuances in the next few years.
Financial sector funds swim against the outgoing tide in late August
August 29, 2008
Funds saw plenty of redemption activity during the fourth week of August. But investors were in no hurry to reallocate the money they pulled out. Of the 24 major equity, sector and fixed income fund groups tracked by EPFR Global, 17 posted outflows totaling $7.6 billion while only three of the seven that absorbed fresh money took in over $150 million. Emerging markets equity funds posted outflows for the 11th time in the past 12 weeks, US Equity Funds saw their four-week winning streak snapped and redemptions from Europe Equity Funds hit an eight week high.
One fund group, Financial Sector Funds, accounted for nearly 60% of the inflows posted by the seven fund groups that did attract new money. The other six were Consumer Goods, Real Estate, Utilities and Healthcare/Biotechnology Sector Funds and US and High Yield Bond Funds. Meanwhile flows in an out of Money Markets Funds, which have served as the sidelines for most of year, were essentially neutral for the second week running.
At the country and sub-regional level Middle East and Africa Funds and China Equity Funds resumed their winning runs while Russia and Brazil Equity Funds extended their losing streaks to nine and 12 weeks respectively.
US, Global, Europe and Japan Equity Fund Flows
Some better than expected US capital expenditure, 2Q GDP and durable goods data did not translate into positive flows for US Equity Funds or those funds geared to markets that depend heavily on their ability to export to the world's largest economy. Investors pulled $2.52 billion out of US Equity Funds, $1.23 billion out of Europe Equity Funds and $128 million from Japan Equity Funds during the week ending August 27.
In the case of Japan, the optimism that rising prices would chase domestic savings into Japanese equity markets has given way to pessimism about the risk of stagflation. Economic growth during the second quarter was negative while wholesale and headline inflation rates have climbed to 27 and 10 year highs respectively. In addition, a stimulus package being mooted by Japan's government is being interpreted by many foreign investors as an unwelcome return to pre-reform retail politics. Japan Equity Funds have now posted outflows for five straight weeks.
Growth in the 15-member Eurozone is also slowing sharply as tighter credit squeezes domestic demand. Inflationary pressures, meanwhile, have prompted hawkish rhetoric from the European Central Bank. Redemptions from Europe Equity Funds in late August accelerated to levels last seen in early July and year-to-date outflows are now within striking distance of $45 billion versus $50 billion for the much larger group of US Equity Funds.
The US Equity Funds experienced outflows for the first time in five weeks as modest flows into Mid Cap Funds were more than canceled out by redemptions from Large Cap Blend ETFs. The pendulum swung away from growth stocks during this week, with Value oriented funds outperforming their Growth peers in both flow and performance terms across all capitalizations.
The two diversified fund group geared primarily to developed markets, Global and Pacific Equity Funds, recorded their third straight week of outflows respectively. The $835 million removed from Global Equity Funds pushed year-to-date outflows from last year's most successful fund group in terms of attracting new money to nearly $8 billion.
Emerging Market Equity Fund Flows
All four of the major emerging market fund groups recorded outflows during the fourth week of August with EMEA Equity Funds hit the hardest in percentage terms. Investors pulled money out of the diversified Global Emerging Markets (GEM) Equity Funds for a fifth straight week and extended Latin America Equity Funds' losing run to 12 weeks and $4.1 billion. Since the second week of June EPFR Global-tracked emerging market funds have surrendered a net $23.1 billion.
Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during 3Q08, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina. Investors still have appetite for direct exposure to China, although the $175 million they committed to China Equity Funds was more than offset by redemptions from Asia ex-Japan Equity Funds, Greater China Equity Funds, India Equity Funds and Taiwan Equity Funds.
EMEA Equity Funds remain the only major emerging markets fund group to post inflows year-to-date, but the $2.9 billion they had absorbed by the end of 1H08 has dwindled to under $230 million going into September. The abrupt loss of enthusiasm for Russia, fueled by state pressure on firms in "strategic" sectors and the recent incursion into Georgia, has played a role with outflows from Russia Equity Funds since late June exceeding $800 million. And since late June investors have pulled nearly $4 billion out of the Emerging Europe Equity Funds, which currently maintain a 42% weighting to Russian equities.
Sector Funds
Once again it was Financial Sector Funds that caught the eye. Following two weeks of strong outflows totaling $2.3 billion these funds absorbed a net $813 million during the fourth week of August as faith in the US government's willingness top rescue mortgage giants Freddie Mac and Fannie Mae, allied to better news about house prices and sales, rekindled optimism that the worst is over for this sector. Real Estate Sector Funds also benefited from this shift in sentiment, absorbing a net $175 million for the week, and flows into Consumer Goods Sector Funds hit a 12 week high.
Also among the winners were Healthcare/Biotechnology Sector Funds, which extended their winning streak to seven weeks and $2.3 billion, and Utilities Sector Funds. Investors removed money from Energy Sector Funds for a fifth straight week despite their improved performance ahead of the Northern Hemisphere's heating season, pulled another $114 million out of Commodities Sector Funds and snapped Technology Sector Funds' five week inflow streak.
Funds saw plenty of redemption activity during the fourth week of August. But investors were in no hurry to reallocate the money they pulled out. Of the 24 major equity, sector and fixed income fund groups tracked by EPFR Global, 17 posted outflows totaling $7.6 billion while only three of the seven that absorbed fresh money took in over $150 million. Emerging markets equity funds posted outflows for the 11th time in the past 12 weeks, US Equity Funds saw their four-week winning streak snapped and redemptions from Europe Equity Funds hit an eight week high.
One fund group, Financial Sector Funds, accounted for nearly 60% of the inflows posted by the seven fund groups that did attract new money. The other six were Consumer Goods, Real Estate, Utilities and Healthcare/Biotechnology Sector Funds and US and High Yield Bond Funds. Meanwhile flows in an out of Money Markets Funds, which have served as the sidelines for most of year, were essentially neutral for the second week running.
At the country and sub-regional level Middle East and Africa Funds and China Equity Funds resumed their winning runs while Russia and Brazil Equity Funds extended their losing streaks to nine and 12 weeks respectively.
US, Global, Europe and Japan Equity Fund Flows
Some better than expected US capital expenditure, 2Q GDP and durable goods data did not translate into positive flows for US Equity Funds or those funds geared to markets that depend heavily on their ability to export to the world's largest economy. Investors pulled $2.52 billion out of US Equity Funds, $1.23 billion out of Europe Equity Funds and $128 million from Japan Equity Funds during the week ending August 27.
In the case of Japan, the optimism that rising prices would chase domestic savings into Japanese equity markets has given way to pessimism about the risk of stagflation. Economic growth during the second quarter was negative while wholesale and headline inflation rates have climbed to 27 and 10 year highs respectively. In addition, a stimulus package being mooted by Japan's government is being interpreted by many foreign investors as an unwelcome return to pre-reform retail politics. Japan Equity Funds have now posted outflows for five straight weeks.
Growth in the 15-member Eurozone is also slowing sharply as tighter credit squeezes domestic demand. Inflationary pressures, meanwhile, have prompted hawkish rhetoric from the European Central Bank. Redemptions from Europe Equity Funds in late August accelerated to levels last seen in early July and year-to-date outflows are now within striking distance of $45 billion versus $50 billion for the much larger group of US Equity Funds.
The US Equity Funds experienced outflows for the first time in five weeks as modest flows into Mid Cap Funds were more than canceled out by redemptions from Large Cap Blend ETFs. The pendulum swung away from growth stocks during this week, with Value oriented funds outperforming their Growth peers in both flow and performance terms across all capitalizations.
The two diversified fund group geared primarily to developed markets, Global and Pacific Equity Funds, recorded their third straight week of outflows respectively. The $835 million removed from Global Equity Funds pushed year-to-date outflows from last year's most successful fund group in terms of attracting new money to nearly $8 billion.
Emerging Market Equity Fund Flows
All four of the major emerging market fund groups recorded outflows during the fourth week of August with EMEA Equity Funds hit the hardest in percentage terms. Investors pulled money out of the diversified Global Emerging Markets (GEM) Equity Funds for a fifth straight week and extended Latin America Equity Funds' losing run to 12 weeks and $4.1 billion. Since the second week of June EPFR Global-tracked emerging market funds have surrendered a net $23.1 billion.
Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during 3Q08, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina. Investors still have appetite for direct exposure to China, although the $175 million they committed to China Equity Funds was more than offset by redemptions from Asia ex-Japan Equity Funds, Greater China Equity Funds, India Equity Funds and Taiwan Equity Funds.
EMEA Equity Funds remain the only major emerging markets fund group to post inflows year-to-date, but the $2.9 billion they had absorbed by the end of 1H08 has dwindled to under $230 million going into September. The abrupt loss of enthusiasm for Russia, fueled by state pressure on firms in "strategic" sectors and the recent incursion into Georgia, has played a role with outflows from Russia Equity Funds since late June exceeding $800 million. And since late June investors have pulled nearly $4 billion out of the Emerging Europe Equity Funds, which currently maintain a 42% weighting to Russian equities.
Sector Funds
Once again it was Financial Sector Funds that caught the eye. Following two weeks of strong outflows totaling $2.3 billion these funds absorbed a net $813 million during the fourth week of August as faith in the US government's willingness top rescue mortgage giants Freddie Mac and Fannie Mae, allied to better news about house prices and sales, rekindled optimism that the worst is over for this sector. Real Estate Sector Funds also benefited from this shift in sentiment, absorbing a net $175 million for the week, and flows into Consumer Goods Sector Funds hit a 12 week high.
Also among the winners were Healthcare/Biotechnology Sector Funds, which extended their winning streak to seven weeks and $2.3 billion, and Utilities Sector Funds. Investors removed money from Energy Sector Funds for a fifth straight week despite their improved performance ahead of the Northern Hemisphere's heating season, pulled another $114 million out of Commodities Sector Funds and snapped Technology Sector Funds' five week inflow streak.
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