US equity funds draw renewed inflows as Treasury yields ease

US equity funds attracted inflows in the week to October 14, following outflows the previous week, as Treasury ​yields eased from recent peaks and investors looked ahead to a strong earnings ‌season, although the technology ‌sector faced outflows amid concerns over rising debt levels.

Investors purchased a net $13.01 billion in US equity funds during the week, reversing net outflows ​of $5.1 billion in the previous week, according to LSEG Lipper data.

The technology sector, meanwhile, recorded net outflows of $5.21 billion, its largest weekly outflow since June ​24.

The US 10-year Treasury yield fell about 26 basis points from the 24½-year high of 5.3645% reached the ​previous week, amid expectations that the Federal Reserve may hold interest rates ​steady at its meeting this month.

Investors also drew confidence from strong corporate earnings expectations in the ongoing earnings season. LSEG data, based on analyst estimates for 2,076 US large- and mid-cap companies, forecasts year-on-year profit growth of 29.99% for the most recent quarter, with the technology sector expected to post growth of 57.64%.

US large-cap equity funds attracted $16.55 billion, reversing roughly $14.08 billion in outflows the previous week. Investors also bought $2.12 billion in multi-cap funds and $541 million in small-cap funds, while selling a net $651 million in mid-cap funds.

US bond funds remained popular for a 26th consecutive week, attracting net inflows of $6.45 billion.

General domestic taxable fixed-income funds recorded $1.91 billion in net inflows, marking a fourth straight week of net purchases. Investors also added $1.61 billion to municipal debt funds and $1.12 billion to short- and intermediate-term government and Treasury funds.

Meanwhile, investors withdrew $45.93 billion from money market funds, ​following $68.49 billion in net purchases the previous week.

A warning from MSCI that it may exclude Indonesia from its stock market indexes — benchmarks used by global financial investors — risks cutting the nation off from international capital and relegating it to an investment backwater.

MSCI stunned investors by proposing that it ​remove Indonesia from its global stock indexes altogether, months after floating a less severe downgrade from emerging market to frontier over opaque ownership and securities trading practices.

A cut to standalone status would be unusually harsh and rare: ‌Argentina was dropped in 2021 for imposing capital controls, ‌and Russia in 2022 after Western sanctions cut it off from global finance over its invasion of Ukraine. Indonesia would find itself in a small group of standalone markets that includes Lebanon and Zimbabwe.

Indonesia has been an MSCI emerging market since 1989, and a downgrade of the proposed magnitude would be a huge reversal for a market that until ​recently was a foreign investor favourite.

Removing the country from major global benchmarks that steer billions of dollars in foreign investment could hurt far more than just its stock market. 

“The proposal ... goes well beyond what we had considered our worst-case scenario,” said Rully Arya Wisnubroto, head of research at Mirae Asset Sekuritas in Jakarta.

The MSCI announcement wiped about $65 billion off the value of Indonesian equities, with an 11.6% drop on the Jakarta Composite Index — its biggest one-day fall ​since the Asian financial crisis in 1998.

The shock spread beyond equities, with the rupiah falling as much as 0.8% and some analysts raising the possibility of a central bank interest rate hike on Tuesday, when rates had been expected to stay on hold.

“The purpose (of a rate ​hike) would be pre-emptive, i.e. in order to prevent the expected equity foreign outflows from widening to the fixed income side as well as being exacerbated by resident ​capital outflows,” Citi wrote in a note to clients.

Unlike a downgrade to frontier status, a move to standalone would provide no offsetting demand from frontier-index funds, leaving passive emerging-market money heading for the exits.

Banks estimate the move could trigger $3 billion to $6 billion in passive outflows, with JPMorgan putting the figure at $4.8 billion and UBS warning active investors could pull another $15 billion.