There was no shortage of variables for sector investors to factor into their investment choices during late May. Among them an extension of OPEC’s oil production capping agreement, expectations of another U.S. interest rate hike, signs of cooling Chinese demand for raw material, the mixed outlook for U.S. President Donald Trump’s major policy initiatives and strong industrial production numbers from Japan and Europe.
Against this backdrop, flows into EPFR Global-tracked Industrial Sector Funds and out of Energy Sector Funds hit five- and seven-week highs respectively, Technology Sector Funds took in fresh money for the 13th straight week, Financial Sector Funds posted consecutive weekly inflows for the first time since late February and commitments to Utilities Sector Funds climbed to levels last seen in late in the second quarter of 2016.
The redemptions from Energy Sector Funds came after OPEC extended an agreement aimed at keeping a floor under oil prices, and before Trump announced his intention to pull the U.S. out of the climate change accords reached in Paris in late 2015. Investors are skeptical the accord will check production, given the output of countries that are exempted (Libya and Nigeria) or outside the agreement (the U.S.).
While growing industrial production and manufacturing in markets ranging from Japan to the Eurozone has bolstered flows into Industrial Sector Funds, there is less confidence about the impact of this trend on the demand for energy and commodities. China’s latest clamp-down on shadow banking and moderating growth raise the possibility that any increases in demand from developed markets will be offset by a reduction in Chinese imports. Flows into diversified Commodities Sector Funds, which have significant exposure to industrial commodities producers, have lost momentum in recent months.
Precious Metals Funds have also come under pressure, in part because higher U.S. interest rates reduces their attraction as hedges against dollar weakness and inflation. Analysis by EPFR Global sister company Trimtabs Investment Research indicates that, “Precious Metals Equity ETFs shed $900 million (6.6 percent of assets) during the past two weeks, including an outflow of $800 million (5.6 percent of assets) on May 24 that was the largest one-day outflow in our records.”