Europeans grow cautious in January, reacting to Middle East turmoil

European investors showed caution in January, moving into bonds as they reacted to changes in the macroeconomic environment, in particular turmoil in the Middle East.

Latest monthly data from the European Fund and Asset Management Association (EFAMA) shows investors turned to bonds in the first month of 2011, as political unrest spread through the Middle East and North Africa, particularly Tunisia and Egypt, and the price of commodities such as oil spiked.

Net buying of bond funds hit €2bn in January against net redemptions of €7bn seen in December 2010. November sales were flat.

Data for bond fund sales over the past year show how investors have reacted to changes in the macroeconomic environment.

In May and June 2010, when troubles within the eurozone were at their peak, sales of bond funds fell, but picked up again between July and October.

Sales of balanced fund also point to a trend towards caution: in December, net sales were at breakeven point, but in January more buying pushed net sales to €4bn. 

In contrast, money market funds continued to suffer in January, with net redemptions of €11bn. The balance of sales was, however, improved on the previous month, when redemptions were €37bn.

Equity funds saw a €10bn drop in net sales in January, down to €9bn from €19bn in the previous month.

EFAMA’s director of economics and research Bernard Delbecque said an overall improvement in equity sales since October 2010 until January 2011 showed a return to confidence from investors.

Whether the recent crisis in Japan will affect the improved performance of equities is dependant on the impact on its own economy and how that plays out for the global economy, he said.

“Unless what has happened in Japan will compile into something catastrophic, net inflows into equities are likely to continue, as long as projections for the world economy outlook remain good,” he said.

“Of course, the data for March are likely to show some impact of the events in Japan, as investors form their judgment about the consequences of the crisis.”

The dominance of developments in Europe tends to be reflected in EFAMA’s results, which show European appetite.

But Delbecque said global developments were increasingly important.

“We are living in a global world. What happened in 2008 with Lehman Brothers was reflected in European data too.”

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