September 30, 2016 / 12:11 PM / in 10 months

Heavy equity, emerging market inflows signal return to "risk-on" -BAML

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LONDON, Sept 30 (Reuters) - Global investors returned decisively to "risk-on" mode in the past week, Bank of America Merrill Lynch (BAML) said on Friday, noting multi-billion dollar inflows into equity, corporate bond and emerging market funds.

Its data, which covers flows through Wednesday, does not appear to capture the broader market stress relating to Deutsche Bank, whose shares have slumped to record lows following the imposition of a potential $14 billion fine from U.S. regulators, sparking contagion fears across the European banking system.

Equity fund inflows of $5.6 billion were the largest in seven weeks, BAML said, noting that $9.9 billion flows to exchange-traded funds had masked $4.2 billion that fled mutual funds.

The prior week had seen $7.4 billion flee world equity funds as investors had turned cautious before Sept 20-21 meetings of the U.S. Federal Reserve and Bank of Japan.

But with those meetings out of the way, Japanese and U.S. equities received $2.2 billion and $4.2 billion, respectively, over the week, though Europe lost another $1.9 billion for a record 34-week outflow streak.

BAML attributed the improved sentiment to rock-bottom volatility as the Fed indicated it is in no rush to raise interest rates, and Democrat Hillary Clinton was seen to have won the first debate between the two presidential candidates.

Japan's central bank too affirmed its commitment to continuing its asset purchase programme as long as needed, calming jittery markets.

Bond fund inflows hit a seven-week high of $9.3 billion, though government debt funds lost $1 billion. Money flowed instead to high-yield bonds which took in $2.9 billion, the largest in 11 weeks, while emerging debt received $2.4 billion.

Emerging debt has now taken new money for 13 straight weeks while emerging equities received $1 billion, bringing year-to-date inflows to $5.8 billion.

BAML highlighted emerging debt, which has enjoyed a record 13-week inflow streak of $27 billion, as a "crowded trade" along with investment grade and municipal bonds.

It said European stocks and "active" mutual funds were most unloved, with 34 and 30 straight outflow weeks respectively.

BAML also noted its clients were sceptical about switching into assets that benefit from a higher-inflation environment.

Earlier this month, world bond markets were roiled by a sudden spike in yields though that was due more to the notion that central banks were rethinking their ultra-loose monetary policies, rather than any signs of inflation or better growth.

BAML noted that the flow of funds has clearly favoured so-called deflation assets. In the past year, $109 billion has fled equity funds while bond funds have received $137 billion. (Reporting by Sujata Rao; Editing by Jamie McGeever and Catherine Evans)

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