Nervous investors have continued to sell out of European equities in April, and have instead been gaining exposure to local bond ETFs in an effort to diversify risk within portfolios, while also seeking out safe haven assets, such as gold.
Over the month to 26 April, European Bonds ETFs have gathered cumulated inflows of €626 million (and bringing inflows for the year to date up to €2.3 billion), according to TrackInsight data, despite lacklustre returns of just 0.5% for the period.
Meanwhile, European Stocks ETFs have suffered continuous outflows throughout the month, shedding a total of €6.6 billion during the period and reversing all the positive flows gathered at the beginning of the year.
Investors pulled money out of European stock markets despite stronger performance of equities over fixed income during the month to 26 April, with European Stock ETFs returning an attractive 6.1%.
European Central Bank plays a role
One of the reasons for the inflows into European bond funds could have been the desire of investors to make short-term gains on the expectation of rising bond prices in the run-up to the European Central Bank (ECB) meeting that took place on Thursday 26 April.
At the meeting, ECB President Mario Draghi voiced a cautious approach to monetary policy given the uncertain global economic conditions, providing no clear indication when the Bank would begin to reduce its bond purchases.
As a result of this cautious stance, Eurozone bond yields were seen pulling back from recent highs, after rising in unison with US yields earlier in the week. Germany’s benchmark 10-year Bund yield, for example, has dropped from a high of 0.636% on 23 April to its current level of 0.571%, as of 27 April.
Investors and the European Central Bank alike are undoubtedly responding to geopolitical concerns, most notably the hovering threat of a trade war between the US and China, but the cautious approach has also been triggered by a raft of softer data in the Eurozone and concerns about the future strength of the euro.
A string of recent data has shown that the Eurozone has got off to a rocky start in 2018, with inflation undershooting its 2% target at just 1.3% in March, while economic growth has lost some momentum in recent weeks, according to the ECB. The euro has also fallen back from $1.2380 in mid-April to $1.2130, though it is still stronger now than at the beginning of the year.
But the flight to safety is not unique to investors in European assets. Across developed markets, buyers appear to be swapping equities from bonds.
The Developed Bonds ETF sector has gathered a total of $13.4 billion over the month to 26 April, TrackInsight data shows, while Developed Stocks ETFs overall have only attracted a net $1.3 billion over the same period.
Equally, investors are fleeing into other safe haven assets, such as gold ETFs, which have taken in €1.6 billion over the same period, despite returning a negative 0.11% as the price of bullion has fallen. In the coming months, geopolitics is likely to dictate where investors park their cash to a significant extent.