Invesco ETF European Demand Monitor: April flows and May outlook
- EMEA-domiciled products saw inflows of $11.8 billion (bn) this month, taking overall AUM for the region to $1.58 trillion, the highest level since March last year, and now just $44 bn off the previous peak.
- Fixed Income led net inflows with $7.2 bn, whilst equities saw $4.5 bn and commodity products were flat for the month.
- This year is set to provide a more supportive backdrop for financial markets and with that, ETF flows. Lingering uncertainty about the economic outlook is likely to keep investors focused on large, liquid core exposures across asset classes, although the improving economic outlook and rates close to peaking is also leading some investors to increase their risk exposures.
Industry ETF flows by asset class
- At $11.8 bn, the pace of net inflows into EMEA ETFs has remained relatively stable through the last three months after a very strong January.
- Products in the developed market Investment Grade Credit and Government Bond spaces dominated, with US Treasuries (+$2.3 bn) and EUR IG (+$2.2 bn) leading. Global equity funds took in $3.1 bn, whilst overall outflows were fairly light, led by US Equity (-$0.6 bn) and Value focused funds (-$0.5 bn).
- April was a quiet month for markets in terms of performance, with all major asset classes posting modest gains. Equities rose 1.5%, whilst fixed income was up 1.3% and commodities 0.4%, each are now firmly positive YTD at +9.0%, +4.2% and +5.3% respectively.
Outlook for ETF flows
Investor focus switched back from the mini banking crisis to the economic outlook in April as the rapid response by authorities appeared to have prevented a more systemic issue. In particular, US inflation falling further to the lowest level since May 2021, led to an increasing belief that US rates are very close to the peak and, while inflation remains stickier in Europe, that the Bank of England and European Central Bank are also not far from a pause in the hiking cycle. Confirmation of peak rates in upcoming central bank meetings, along with issues in the banking sector dissipating, are likely to be key for investment preferences in coming months. Overall, it currently looks like central banks have tightened policy sufficiently to bring down inflation while not choking off growth which, if correct, could provide a favourable outlook for all asset classes in the months ahead.
- Equities: While some uncertainty about the banking sector remains, the economic outlook is likely to maintain investor focus on large, liquid core exposures. However, the end of the zero-covid policy is also likely to lead to further interest in Chinese equity exposures, building on the strong inflows seen last year, as well as broad emerging market exposures. There is also likely to be continued strong demand for ESG along with thematic equity ETFs that provide exposures to greener technologies.
- Fixed income: The risk off sentiment driven by events in the banking sector in March has led to a pick-up in demand for government bonds. In addition to their perceived safe-haven nature, they could also benefit from less hawkish central banks. However, credit spreads also widened which makes investment grade a choice that could perform well in many scenarios. While it’s too early to know if central banks will limit further rate hikes considering recent events, if they do and inflation remains stickier, then interest could return to inflation-linked bonds as well.
- Commodities: Gold got a boost due to events in the banking sector in March and has stabilised around the $2,000 mark over the last month, just shy of all-time highs. It appears that both its perceived safe-haven nature, potential to hedge against inflation and a weaker US Dollar could lead to further inflows in coming months.