Huge equity funds outflow has awkward echoes of 1998 Asian crisis

Huge equity funds outflow has awkward echoes of 1998 Asian crisis

Increasing concern about the effect of a possible trade war between the US and China has forced investors in equity funds to head for the exits.

Investors pulled $29.7bn from equity funds in the week ended June 27, the second largest weekly outflow since the beginning of the millennium, according to data provider EPFR.

The retreat follows Washington’s move to impose tariffs on $50bn of Chinese imports. US president Donald Trump has also threatened to add tariffs to a further $200bn of Chinese imports if Beijing retaliates.

The withdrawals from equity funds have weighed on the US benchmark S&P 500 index which has retreated 4.8 per cent from its all-time high in January. At the same time, China’s Shanghai Composite has become a bear market, falling more than 20 per cent from its January peak.

In addition, the Chinese renminbi fell last week to its lowest level of the year amid worry that the tension over trade between Washington and Beijing might also lead to a currency war.

The deterioration in risk appetite evident in equity fund outflows is also illustrated by rising demand for US Treasury bills, viewed as one of the safest asset classes available. Bank of America Merrill Lynch noted that allocations to Treasury bills among its private client allocations had surged to a 10-year high.

Some investors see uncomfortable parallels between the current market and the 1998 Asian crisis, which coincided with the collapse of Long Term Capital Management, at that time the world’s largest hedge fund manager. The Federal Reserve responded by cutting US interest rates. Easier monetary policy helped fuel a price bubble in US tech stocks that burst in 2000 and led to widespread losses.

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