The first half of the year has seen a turnaround in the fortunes of many global assets, as fears of a global trade war and concerns over the political future of the Eurozone dominated the news pages and affected sentiment for European assets.
As the year began, troubles started for the Eurozone, with Italian elections in March reigniting fears over the rise of populism in the bloc and driving investors out of European assets.
Over the year to 6 July, European Stocks ETFs have suffered cumulated outflows of €13.5 billion, having accelerated throughout the beginning of 2018 (see chart).
The last month alone saw some €5.4 billion leave this sector and the returns have fluctuated wildly throughout the period, as Italy’s political stalemate showed no signs of dissipating, Germany was engaged in an escalating row over the migrant crisis, and the UK continued to grapple with the terms of Brexit.
Surprisingly, UK equities did not suffer as much overall, having only just managed to get out of the red over the six month period to 6 July, with cumulated inflows of €235 million. The last month was particularly successful, bringing in €527 million.
This suggests that perhaps investors are more concerned about issues affecting the political integrity of the European Union than its separation from the United Kingdom.
Emerging markets beat European assets in terms of inflows
Unlike European assets, emerging markets have collected substantial positive inflows over the six month period, as overall investor sentiment for the region fared better, while the lack of returns from developed markets drove them to seek other opportunities.
Over the six months, Emerging Stocks ETFs have taken in cumulated flows of €7.3 billion. But as returns have deteriorated, so did the support from investors.
The last month to the 6 July brought overall outflows of €6.3 billion, dealing a particular blow to the sector as investors were spooked by a performance loss, which amounted to nearly 7% by the end of the period (see chart).
The recent outflows clearly show a turn in sentiment towards emerging assets over the recent weeks, largely due to the fears of a trade war between the United States and China, which could cause a ripple effect throughout the emerging region.
Meanwhile, falling oil prices have affected the price of Russian assets, given its heavily oil dependent economy, and early presidential elections in Turkey encouraged falls in Turkish stocks over the period. However, both recovered some of the losses by the end of the month.
Bonds triumph over equities
As the US has continued on its path of monetary tightening, bonds have been attracting more attention as investors looked for a safer place to park their money. Over the six months, Bonds ETFs overall have seen particularly strong inflows, with a total of nearly €35 billion going into the sector, even though returns were just 0.9% (lower than returns for UK stocks, for example).
In the last month alone Bonds ETFs took in €9.3 billion (see chart), outstripping demand for developed stocks ETFs as a whole, which took in €2 billion in total assets.
Government bonds have been particularly popular, attracting more than €30 billion of the total inflows into bonds ETFs over the six-month period. But even emerging bonds, which have overall performed far worse than developed government bonds over the six months, have attracted investor attention, taking in €1.5 billion over the period.
In future months, the continuation of this trend could lead to a more pronounced reversal of fortunes for bonds versus equities, with the long-awaited great rotation out of equities finally beginning to take place.
Much of this will depend on the political situation in the European Union and on whether the global trade war escalates, which could spell more bad news for equity markets and potential billions of euros of inflows into fixed income.