March was a bad month for European large cap equity ETF flows, with a total of €3.9 billion leaving the sector as investors continued to be unnerved by the political uncertainty in the region following the outcome of the Italian election early in the month, as well the latest rhetoric from the European Central Bank (ECB).
According to TrackInsight data, European large caps continued to see outflows nearly every day throughout the month (see chart below), with the daily amount of money taken out rising towards the end of March. A total of €3.88 billion was taken out from the sector by the end of the month, while performance also reflected the sorry state of affairs, with a return of -2.5% over the period.
Italian election hit investor sentiment in March
Investors were evidently concerned about the current situation in Italy, where the general election resulted in a stalemate between the key participants. Although this outcome was not unexpected, what did shock investors was the strong support the public showed for Matteo Salvini’s right wing Lega party, which received 17.7% of the total vote, outstripping ex-Prime Minister Silvio Berlusconi’s Forza Italia (on 13.9%, far lower than its previous result).
Meanwhile, the anti-establishment Five Star Movement gained the strongest support from the electorate, receiving 32.2% of the votes. Yet this has left the country with no formal government until a coalition is formed, and the uncertainty has been weighing on investor sentiment.
On 4 April, Italian president Sergio Mattarella began formal discussions to resolve the situation, while the latest reports suggest the country’s three right-facing parties- Lega, Forza Italia and Brothers of Italy – could come together to form a government. But until the outcome is clear, European markets are likely to be subject to volatility.
Meanwhile, this month also saw the ECB hint at tighter monetary policy down the line after the Bank removed its commitment to continue increasing bond purchases as part of its quantitative easing programme. It is not clear if this is a sign that loose monetary policy will come to an end in September, a decision that will depend on the state of the global and domestic economy, but it is another concern playing on investors’ minds.
Fears of a trade war kept investors on their tip toes during the month
And finally, escalating tensions between the US and its trading partners, which could yet lead to an outright trade war, have also destabilised support for equity markets in general, and those likely to be affected by these developments in particular.
Although the main focus has been on US-China relations and the potential for a trade war to escalate between the two, earlier in the month the Eurozone was also in the line of fire, when it was unclear whether US President Donald Trump would exempt the EU from tariffs on aluminium and steel.
This threat has now evaporated, but outflows from European large caps continue. In the first week of April, the sector has shed another €1.7 billion, continuing on a downward trend.
Even if Europe is unaffected by the tariffs imposed by America, a trade war between the US and China is bound to affect stock markets across the globe in a negative way.