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Investment flows: Reverse and reverse again

Hurricane Katrina blamed for extreme changes in cross-border flows.

In the aftermath of Hurricane Katrina, US investors dumped international stocks and reduced their risk exposure in a change of sentiment so violent that it draws comparisons with the LTCM and Russian crises of 1998.

For most of the year investors have shown a healthy appetite for risk. US investors have been particularly keen, increasing their exposure to equities in general and international equities in particular.

In September, however, US investors had a dramatic change of heart. They sold international stocks in large numbers and ran for cover back home. The extreme shift in sentiment, interpreted from cross-border fund flows, has been compared with the LTCM and Russian crises of 1998 and the Y2K hysteria that caused markets to plunge in 1999.

According to State Street Global Markets, which analysed the cross-border fund flows, investor sentiment fell into what it classifies as the most extreme level of risk aversion.

This level of sentiment, which State Street calls a “riot point”, typically signals a broad-based retreat from equities in general in favour of bonds or cash.

Then, in October, investors had another change of heart. Cross-border flows went into reverse as investors herded back into Japanese and emerging-market equities.

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