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Hunt For Yield Intensifies

September 2016

Robust institutional demand for Emerging Market stocks and bonds gathers pace and EM portfolio allocations rise to a year-high

Mutual Funds & ETFs Pick Up
Flows to global mutual funds and ETFs picked up last month with net inflows of some $35 billion since late July. With the hunt for yield still very much in force, global bond funds have seen particular interest, attracting more than $28 billion over the past month. Flows to equity funds have been more modest at $7 billion, reflecting a range of factors including concerns about corporate creditworthiness, profitability, and stock market valuations. : EM funds have seen net inflows of some $13.2 billion since late July–more than mature market funds in terms of AUM, says a report by IIF. With EM funds outperforming mature markets, the share of EM assets in the portfolios of global mutual fund and ETF investors reached 11.7% by mid-August — the highest level in a year.

Dollar’s U-Turn
The hawkish comments from Janet Yellen on August 26 bolstered expectations over the Federal Reserve raising US rates in 2016. Investors were gifted the clarity long sought when Yellen suggested that the case for raising US rates had strengthened in recent months consequently uplifting the DollarFXTM Research Analyst Lukman Otunuga notes that while there have been ongoing talks of September being a live meeting to raise US rates, it seems likely that the Fed waits for further positive domestic data to justify raising US interest rates in December. With the Jackson Hole meeting dispelling the period of uncertainty, the Dollar could trade higher as bets mount over the Fed breaking this tradition of central bank caution.

Commodities Strengthen
Before Yellen’s comments, the dollar continued to weaken, driven by a global system awash with cash seeking higher yields and riskier assets. Last month, Commodities were on track for their best weekly performance in seven weeks. According to Ole Hansen, Head of Commodity Strategy at Saxo Bank, the grain sector showed a positive return for the first time in 10 weeks. This despite the recent WASDE report from the US Department of Agriculture forecasting a bin-busting corn and soybean crop this year.

Oil Rallies Post Brexit But…
Following the Brexit vote on June 23, oil dropped more than 20% thereby moving into a technical bear market. Within the past few weeks, however, a 22% rally has taken it straight back into bullish territory, Hansen notes. The weakness seen during July was driven by concerns that high inventories of oil and products would further delay the rebalancing process, not least considering that we were heading towards the time of year when refinery activity normally begins to slow thereby adding additional pressure on oil storage facilities. This combined with a rising number of US oil rigs and rising production from several major Opec producers helped to support a major accumulation of short positions by hedge funds. Oil production in Iran and Saudi Arabia has also risen by 1 million barrels/day since January, reports Bloomberg.

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