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Market sentiment: Investors lose their risk appetite

The equity market’s violent reaction to seemingly innocuous data has puzzled many commentators. At first bond investors reacted much more calmly to inflation fears but subsequently they seem to have been infected by the equity investors’ pessimism.

Although inflation fears have played a part, other factors have made a contribution.

“The plainer, but more compelling, argument for recent market movements is that, first, risk appetite was extended across asset classes (investors were simply too complacent on risk assets), and, second, that the downturn which ensued was exacerbated by ‘hot money’ sales and an unwinding of positions,” says Paul Niven, head of asset allocation at F&C.

Despite an improved performance recently, investors are continuing to withdraw money from equity funds, with emerging market equity funds the hardest hit.

All of the major equity fund groups tracked weekly by Emerging Portfolio Fund Research, a fund flows research company, had net redemptions in the week ending June 21, as $7 billion was removed from funds with total assets of $2 trillion. During the past five weeks of global sell-off and heightened volatility, investors have pulled about $22 billion from equity funds, equivalent to 1% of their total assets.

Investors have also increasingly opted to overweight cash. A net 29% of fund managers responding to Merrill Lynch’s Global Fund Managers Survey are now overweight cash, with average holdings having risen to 4.5%, compared with 4.1% in May.

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