Record sums flow into Japan equity funds

Investors have poured money into equity funds this week, with Japanese funds seeing record inflows, as the global share price rally pushed indices to fresh highs.

Overall flows into equity funds tracked globally by EPFR, the funds data provider, hit $14.2bn in the seven days to Wednesday, a 14-week high, and comfortably outpaced inflows of $3.4bn into bond funds. Japanese funds saw $6.8bn of inflows, the highest since EPFR data started in early 2003.

The surge highlighted the investor demand for equities triggered by global central bank action, which has depressed bond yields and encouraged hopes of stronger economic growth.

“We’re in a Goldilocks economic scenario – neither too hot to drive up bond yields, not too cold to threaten earnings. That stability is reducing the risk premium in equities so the global share rally can continue,” said Kevin Gaynor, global head of asset allocation at Nomura in London. The latest inflows into equity funds “could be the start of substantial inflows over coming months”, he added.

The US S&P 500 index reached a fresh all-time high this week, and by lunchtime on Friday was on track to rise almost per cent over the week. The FTSE Eurofirst 300 is at the highest for five years and up 1.2 per cent on the week.

Encouraged by aggressive policy actions to drag the country out of deflation, Japan’s Nikkei 225 has this week pushed through the 15,000 level for the first time since December 2007, and closed on Friday up 2.5 per cent on a week before.

The Bank of Japan’s aggressive bond buying programme has fuelled expectations that Japanese investors will shift funds into overseas assets. But Cameron Brandt, EPFR research director, said 70 per cent of the net weekly inflows into Japanese funds were yen denominated, which “suggests that Japanese investors are still bringing money back home and committing it to domestic asset classes and fund groups”.

Weekly inflows into European equities were a more modest $468m but EPFR said Greek equity funds saw $9m in inflows and have taken in fresh money in five of the past seven weeks – highlighting the revival in investor interest in the eurozone country that triggered the region’s debt crisis in 2010.

Although Japan reported a pick-up in growth at the start of the year, eurozone gross domestic product contracted by 0.2 per cent in the first quarter of this year, turning the region’s recession into the longest since the launch of the euro in 1999.

Despite the strong inflows into equities, evidence of a “great rotation” by investors out of bonds remains scant. Record low bond yields, which move inversely to prices, had encouraged speculation that investors would this year switch into better performing equities. But EPFR’s figures show bond funds have absorbed $165.1bn so far this year – not far short of the $176.4bn absorbed by equity funds.

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