Squaring the AI, energy price and inflation circle 

Coming into June, investors retained their appetite for US and global equity as they discounted the higher-for-longer narrative for energy prices. But they showed limited enthusiasm for fund groups tied to the artificial intelligence (AI) story that, in the best-case scenario, will generate productivity gains that offset the latest inflationary shock from higher energy, fertilizer and other input costs triggered by the current US-Iranian conflict. They also steered fresh money into Inflation Protected Bond Funds for the 18th consecutive week as flows into all Bond Funds hit a record high. 

The week ending June 3 saw Energy Sector Funds post their third outflow over the past four weeks, with redemptions from Natural Gas Funds hitting an 18-week high, while AI Funds chalked up their first outflow in over a month, investors pulled more than $1.4 billion from Korea Equity Funds and another $3.5 billion flowed out of Semiconductor Funds.  

Although Inflation Protected Bond Funds are seeing consistent inflows, two other groups that investors turn to when inflationary expectations climb have seen flows falter in recent weeks. Both Physical Gold and Cryptocurrency Funds have been hit with redemptions five of the past six weeks. 

Overall, the latest reporting period ended with a collective inflow of $23.1 billion for all Equity Funds while Balanced Funds took in $4.9 billion – their biggest weekly total since 4Q14 – and Bond Funds a net $38.9 billion. Investors also steered $122 billion into Money Market Funds and pulled $400 million out of Alternative Funds. 

At the country and asset class fund levels, redemptions from Private Credit Funds jumped to a 12-week high, Autocallable Funds posted their biggest inflow since early February, Mortgage Backed Bond Funds absorbed fresh money for the fifth week running and Physical Silver Funds tallied their largest outflow in nearly three months. 

Emerging Markets Equity Funds 

EFPR-tracked Emerging Markets Equity Funds kicked off June by extending their longest run of outflows since 1H20 as another $6 billion flowed out of Chinese Mainland Equity ETFs, redemptions from the diversified Global Emerging Market (GEM) Funds hit their highest level since late 4Q24 and retail share classes experienced record-setting outflows. 

Also experiencing record setting outflows were EM Equity Funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates. Leveraged EM Equity Funds racked up their sixth outflow over the past eight weeks and EM Dividend Equity Funds their eighth straight while redemptions from EM Collective Investment Trusts (CITs) hit their highest level in over nine months. 

Chinese Mainland Equity Funds posted their 10th consecutive outflow, a run that has seen over $100 billion pulled out of these funds. Among the reasons cited for these outflows are the uncertainty among investors about the fallout from the energy shock and talk of more tariffs and trade barriers as China’s trade surplus hits new heights. 

Fears of a speculative bubble in Korea’s high-flying equity markets prompted some investors to book profits in late June and early May, with foreign domiciled Korea Equity Funds experiencing net redemptions for the fifth time since the final week of April. Elsewhere, outflows from India Equity Funds climbed to an eight-week high as the annual monsoon rains that are a key factor in domestic food production arrived and Taiwan (Province of China) Equity Funds added to their current inflow streak. 

Among the Latin America Country Fund groups, flows into Argentina, Mexico and Chile Equity Funds hit six, seven and 18-week highs, respectively, while Brazil Equity Funds posted their third straight outflow with redemptions from funds based overseas hitting a level last seen in mid-1Q24. So far this year, the best performing fund in the Latin America universe is one offering leveraged exposure to Brazilian oil major Petrobras while the worst performer is another leveraged fund dedicated to a regional fintech company. 

Flows to most EMEA Equity Fund groups were lackluster as negotiations between the US and Iran over the terms of a possible ceasefire and reopening of the Strait of Hormuz drag on. UAE Equity Funds did post their biggest inflow since mid-March. 

Developed Markets Equity Funds 

Another week of strong flows into Global, US and Canada Equity Funds allowed all EPFR-tracked Developed Market Equity Funds to kick off June with another inflow, their sixth of the current quarter and 19th year-to-date. Japan and Europe Equity Funds again recorded outflows. 

The latest flows into US Equity Funds came during a week when Mag Seven company Alphabet unveiled plans to issue up to $80 billion in fresh equity to fund its artificial intelligence (AI) rollout. That is a departure from the pattern of major share buybacks, running at over $1 trillion a year over the past three years, which have supported equity prices by shrinking the number of available shares on open markets.  

During the latest week, funds dedicated to large capitalization stocks dominated the flow picture. Large Cap Blend Funds posted their 13th straight inflow, and biggest since the second week of January, while redemptions from both Large Cap Growth and Value Funds hit 24-week highs. 

Although Europe Equity Funds extended their current outflow streak, investors showed increased conviction at the country level. Finland Equity Funds set a new weekly inflow record while Ireland and Netherlands-mandated funds posted their biggest inflows since 2Q23 and 1Q22 respectively and Portugal Equity Funds extended a run of inflows stretching back to the final week of September. 

Investors looking to Asia pulled more money out of Japan Equity Funds while Singapore Equity Funds recorded their biggest inflow since 2Q08 and Australia Equity Funds since 4Q20. The latest week saw Japan’s government adopt a supplementary budget that aims to protect consumers from the current energy shock but will add to a deficit whose servicing costs are rising as the Bank of Japan slowly raises interest rates. Japan’s current debt to GDP ratio stands at 237% versus 171% for Singapore and 44% for Australia. 

Global Equity Funds, the largest of the diversified Developed Market Equity Fund groups, posted their 21st inflow of the year as funds with fully global mandates absorbed $7 for every $1 committed to Global ex-US Equity Funds. 

Global Sector, Industry and Precious Metals Funds 

The week ending June 3 saw five of the 11 major EPFR-tracked Sector Fund groups post an outflow. Financial Sector Funds experienced the heaviest outflows, ensuring another week of collective outflows for the cyclical groups while solid flows to into Industrials, Utilities and Infrastructure pulled the headline number for all defensive sectors into positive territory.  

Flows into Industrials Sector Funds exceeded $2 billion for the first time since late March, a level of flow that was considered ordinary in the first 11 weeks of the year. One in three of the top 30 funds ranked by net inflows were focused purely on space technology or the space industry, and another nine funds were tied to aerospace, defense, or modern warfare.  

Redemptions from Consumer Goods Sector Funds were the biggest since the final week of 2024, snapping their longest inflow streak of this year. EPFR Sector Flows data shows a different story, with flows from all equity funds into Consumer Staples hitting a six-week high of over $1.2 billion while those into Consumer Discretionary snapped a four-week outflow streak, their longest run since mid-4Q23.   

Three of the five days in the reporting period showed inflows for Technology Sector Funds, but a single day of outflows above $1.6 billion driven by leveraged 2x and 3x funds tracking Nvidia and dedicated Semiconductor Funds offset much of the earlier inflows. Chinese mainland Technology Sector Funds suffered a record-setting outflow, as investors intensified an exit that started in early April.  

Utilities Sector Funds’ snapped their six-week outflow streak, with US and Chinese mainland dedicated funds contributing equally to the headline number. Two funds dominated the headline number, with a fund tracking an S&P index and an ETF focused on electric utilities seeing over $400 apiece. Water Funds, a major subgroup, have seen relatively consistent outflows since early 2022, following a record-setting yearly inflow above $6 billion in 2021, and have posted just four weekly inflows in the past year.  

Bond and other Fixed Income Funds 

The week ending June 3 saw flows into all EPFR-tracked Bond Funds hit a new record high, eclipsing the old mark set late last year. Despite geopolitical concerns, higher energy prices, a new head of the US Federal Reserve and some central bankers talking about temporarily higher inflation, investors currently believe the current market offers attractive yields that are unlikely to move too much in either direction. 

In a recent report, economist Ian Lim at EPFR’s sister company CEIC argues that, “based on CEIC calculations derived from CME Group’s FedWatch tool (which measures the distribution of probabilities), markets are pricing in a central bank rate exceeding the upper bound of the current range by December [and] the likelihood of two [US interest rate] hikes in 2026 is seen at more than 10% – with a tail risk of three hikes priced in, too. (To be sure, the chance of no rate hike this year is still seen at almost 50%.) Back in mid-February, the probability of two or more rate cuts in 2026 was seen at 70%.” 

Longer term, “Our proprietary nowcast sees no immediate relief for headline inflation. It currently calls for further acceleration in May, pushing the CPI inflation well past the 4% mark. [But] the key determinant over the longer term will ultimately be oil prices, and the futures market is not pricing in a sustained energy shortage from the Iran crisis. Data from the Tokyo Commodity Exchange (TOCOM) indicates that traders see some stabilization in oil prices, easing from the peak trajectory seen in April and the beginning of May.” 

During the latest reporting period, US, Global, Europe and Emerging Markets Bond Funds all attracted over $5 billion and flows to asset class groups were similarly robust. The exceptions were Asia Pacific Bond Funds, with flows into Australia-mandated funds offset by redemptions from Japan Bond Funds, and Bank Loan Funds which tallied a modest outflow. Collateralized Loan Obligation (CLO) Bond Funds recorded their biggest inflow since early February, Inflation Protected Bond Funds added to an inflow streak that started in late January and Convertible Bond Funds chalked up their eighth inflow over the past two months. 

Emerging Markets Bond Funds were tilted towards funds with local currency Asia mandates. Overall flows climbed to a six-week high as Local Currency EM Bond Funds took in $5 for every $1 that went to hard currency funds. Flows into Chinese Mainland Bond Funds hit a year-to-date high, with the group’s retail share classes posting consecutive weekly inflows for the first time in nearly 10 months. 

The biggest contributors to the headline number for all Europe Bond Funds, which hit a 45-week high, were Europe ex-UK Regional and Switzerland Bond Funds.