Since the middle of the year, investors have been reducing their exposure to international equities on a scale not seen since the Mexican peso crisis of early 1995. In particular, European and US investors seem to have lost their appetite for risk after the turmoil in global markets.A "safety-first" mentality has also boosted sales of domestic equities, with evidence of extensive switching out of cyclical stocks and into defensive sectors such as tobacco, utilities and food.Although both trends were in evidence before October's global shake-up, analysts believe they have been accentuated by recent volatility. "What we seem to be seeing is a re-run of what happened after Mexico in 1995," says Mr Joe Rooney, global strategist at Lehman Brothers.Since late October, analysts have been watching mutual funds closely for indications of how retail investors reacted to the volatility. Recent statistics have shown a heavy reduction in international exposures. Figures from the Association of Unit Trusts and Investment Funds (Autif) in Britain showed a £319 million sterling net redemption of overseas funds in October.US mutual funds have shown similar trends, according to figures from AMG Data Services. But, whereas British non-emerging market international funds have continued to show inflows, similar funds in the US turned negative at the start of November.European information remains patchy. In France, international flows fell from a positive 3.4 billion francs (£390 million) in July to just 8.9 million francs in October; Italian mutual funds showed interest in international stocks up to September."It is fairly typical for investors to retreat to domestic markets when their appetite for risk is diminishing," says Mr Mark Howdle, European strategist at UBS.

"This is what happened in 1987, 1990 and 1995."Tracking institutional behaviour is more difficult because most funds report on a quarterly basis. Merrill Lynch, which conducts a monthly survey of fund managers' intentions, noted that European and US institutions started to run down large cash holdings to buy US equities and bonds in response to October's upheavals."The initial reaction was to start buying on the dip, accompanied by a surprising knee-jerk move into US shares on the view that the US was a safe haven," says Mr Trevor Greetham at Merrill Lynch.However, in November, European institutions slowed their purchases of US securities and concentrated on buying domestic shares.The shift back towards domestic equities has prompted sharp divergences in sectoral performance across European and US markets."In Europe, there has basically been a polarisation, with investors putting money into classic defensive sectors, such as utilities, tobacco and food," says Mr Howdle.The same trends are evident in the US, with domestic consumer stocks such as utilities and food the top performers in the Standard & Poor's Index.However, there are signs that bargain-hunting investors are beginning to buy back into cyclicals that have suffered most in the recent shakeout.Here, it seems that institutional investors are more optimistic. Having run down their equity positions in the summer as prices rose to dizzy heights, they appear to have seen the falls of late October and last month as a chance to get back into the market.Retail investors, on the other hand, have been more cautious. Capital flows into US mutual funds have slowed and investors have been switching out of equities into bonds.However, history suggests that investors do not stay on the defensive tack for long. Following the Gulf crisis in 1990 and the Tequila shock in 1995, international investment dried up, but only for short periods.In both cases, the period when investors actively repatriated funds represented the bottom of the market.Even in 1987, when international flows went heavily into reverse, European equity markets rallied by 14 per cent in the 12 months after December, the peak period of repatriations.On that basis, with mutual fund flows suggesting we may be close to net repatriations now, the bargain hunters could yet be proved right.