Investors buy emerging market debt and gold-EPFR

Investors scrambling for cover during the U.S. deficit and debt ceiling talks and Europe's ongoing sovereign debt crisis sold stock funds and bought emerging market debt and commodities, data from EPFR showed on Friday.

The Cambridge, Massachusetts-based fund flow tracker reported collective equity fund redemptions for the week ended Aug. 3 totaled $7.9 billion versus a net $1.2 billion outflow from bond funds.

There were few fund sectors that pulled in cash aside from emerging markets and commodities, but they included utilities and country specific funds for Germany and China.

Money market funds had a weekly outflow record of $69.9 billion, according to the firm which started collecting data in 1995.

The fears over a potential U.S. debt default, resolved at least through 2012, and Europe's debt crisis prompted much of the selling. "But daily data showed flows rebounding after the U.S. debt ceiling deal, with over $20 billion returning during the final two days," EPFR said in a statement.

Investors plowed a net $1.29 billion into emerging market debt as economic prospects for developed markets looks increasingly bleaker.

The majority of the cash - $912 million - went into local currency denominated bond funds while hard currency funds pulled in a net $280 million, with the balance going into funds that combine the two categories.

"Emerging markets debt is more of a pure play on emerging markets macro economic fundamentals and fiscal strength relative to developed markets than equity," said Brad Durham, global managing director at EPFR.

"At the moment those fundamentals look a lot safer than the ones on offer in the developed markets."

Emerging market debt funds pulled in fresh cash for a 19th consecutive week.

Investors also sought protection in commodities and gold focused funds. They put a net $2.55 billion into the sector. Most of the money went into gold, Bank of America Merrill Lynch said in a research note.

"Outside of gold and precious metals funds this group actually had a pretty tough week," Cameron Brant, global research director at EPFR said, adding "Rosy demand scenarios for industrial commodities during the second half of the year are thin on the ground at present."

Utilities funds provided a defensive position, with a net inflow of $158 million.

Germany maintained its stance as a safer haven, of sorts, even though it is tied to the European debt crisis. German-focused equity funds pulled in a net $457 million, putting the year-to-date inflows above $16 billion.

Chinese focused funds had net inflows of $61 million.

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The dithering in Europe over the debt crisis and the effect of pushing the U.S. to the brink of default was felt in the developed markets. Add in the gloomy economic outlook and these sectors look like they were hit with blight.

U.S. stock funds had outflows of $7.43 billion while bond funds had a net $3.02 billion worth of net redemptions.

"Redemptions by retail investors hit their highest level in over 14 months," EPFR said, referring to equity funds, where year-to-date the flows turned negative for the first time.

Developed Europe stock funds and bond funds had outflows of $773 million and $337 million, respectively.

EPFR said institutional investors were main responsible for the $20 million in outflows, thus breaking a five-week inflow streak.

Among the sector funds, energy had outflows of $73 million given the likely decline in demand.

But even the normally defensive healthcare/biotechnology sector lost out, with net redemptions of $526 million.

Financial stock funds had outflows of $117 million.

In the fixed income sector, high yield had $1.13 billion in outflows while floating rate funds saw $276 million in outflows on the growing prospect of ongoing low interest rate policies.

Municipal bond funds had $795 million in net redemptions.

Emerging market equities didn't garner investor favor.

The broadly diversified global emerging market equity funds had a net $675 million outflow. Emerging European stock funds had outflows of $149 million.

BRIC (Brazil, Russia, India, China) dedicated funds had outflows of $106 million.

Brazil's outflows reached $78 million, while Russia had $40 million in outflows and India was $95 million in net redemptions.

Latin American stocks overall had $391 million in outflows, with Mexico having its worst week since late December, with outflows of $176 million. Its economy, entwined so closely with the United States, leaves it vulnerable to weakness to its north.

Brazil's government has imposed severe measures to limit the flow of speculative money entering its markets. In its fight against inflation the government raised interest rates, sparking the demand for Brazilian currency and assets.