European large-cap ETFs have seen net outflows of nearly €3.5bn in January, according to TrackInsight data, while US stock ETFs took in the bulk of inflows into equity products.
However, the majority of outflows from European funds were suffered at the beginning of the month, with €7bn leaving the asset class in the week ending 5 January, as concerns mounted over the ability of German Chancellor Angela Merkel to secure a coalition with the Social Democratic Party (SPD).
The Chancellor has been looking for a way to form a government ever since the German elections in September, where she won just 33% of the vote compared to 42% back in 2013. She turned to the SPD after her attempts to secure a coalition with the Green party and the FDP fell through.
However, though the coalition talks with the SPD have dragged on, the outflows from European large-cap ETFs have reversed in recent weeks, albeit investors are tentative in their buying of the asset class. In the week to 26 January, just €666m went into these products, according to TrackInsight.
US equity inflows
Meanwhile, investors displayed a preference for US equities during the month, which took in nearly €40bn in cumulated flows since the beginning of 2018; over the week to 26 January alone, US large-cap ETFs took in some €12bn in net sales, marking a record for the asset class.
Demand for US stocks has been buoyed by US President Donald Trump’s tax reforms, which are supporting American workers and businesses and have pushed up the S&P 500 index to new highs (although the index has fallen back again at the end of January).
Bank of America Merrill Lynch analysts have said the S&P 500 bull market became the second largest of all time last Friday, with the index closing at 2,873 points, while the global equity market cap has risen $57.9bn since 2009 lows, to hit $86.6bn.
The stock market has been supported by huge inflows into equities, with $102bn of net sales year-to-date, marking the fastest pace of the Great Rotation from Treasuries and high yield bonds into equities on record.
However, the strong inflows into risk assets have sparked a warning from the bank’s analyst of a potential “tactical pullback” for the S&P 500 in the first quarter of the year, according to its latest Flow Show report, with the bank’s Bull & Bear indicator producing the highest “sell” signal since March 2013.
As the second month of 2018 begins, investors may face some turbulence in equity markets after the strong demand enjoyed by the asset class during January.