How ETF flows reflect geopolitics

How ETF flows reflect geopolitics

Flows into fixed income and equity exchange-traded funds last year clearly illustrated the ability of macroeconomic events and geopolitics to influence investors’ choices when it comes to allocation.

The divergence in performance between fixed income and equity ETFs was startling.

Bond strategies added €60bn (£50bn) of net new assets over the course of the year, with a steady addition of funds from month to month.

This reflected the calmness of the fixed income markets.

There was no major change in interest rates or central bank policy around the globe.

In addition, credit markets remained placid.

A year of two halves for equities

Equity ETFs, however, were much less popular for the first half of 2019. During the summer, there were almost zero net new assets.

But that altered in the last six months of the year with net new flows reaching €50bn by December.

Volumes into these strategies accelerated over the last few months of the year.

Key points 

  • Equity ETFs were more popular in the second half of 2019 than the first half
  • This reflected change in sentiment about geopolitics
  • The European ETF industry attracted record assets in 2019

During the first six months of the year, fixed income flows were 80 per cent of all flows. By the end of the year, this had declined to 60 per cent.

The change in the fortunes of equity ETF volumes reflects the strong shift in sentiment over the summer.

During the first half of the year, investors were feeling cautious and avoiding risky assets.

This tentative attitude echoed concerns about the US-China trade wars, Mario Draghi’s departure from the European Central Bank and the UK’s intractable Brexit discussions.

Investors were also worried whether the Italian budget would be approved by the European Commission.

In July and August, sentiment started to change.

Talks between the US and China became more positive and Christine Lagarde’s appointment to the head of the ECB was well received.

In addition, the appointment of Boris Johnson as prime minister heralded the end of the Brexit parliamentary stalemate.

And the tension between Italy and the EU was resolved.

As a result, investors became less wary and started to view risky assets more favourably – they started to allocate to equities again.

Allocation to equities picked up over the last few months of the year as those geopolitical tensions retreated further.

A new deal was agreed between the US and China and Mr Johnson’s election win meant the UK will now leave the EU.

While there is still no clarity about the future relationship between the UK and the EU, investors think the level of uncertainty has been reduced.

That is because they believe, whether or not a deal is agreed, any negative economic impact will be principally felt by the UK rather than the remaining 27 members of the union.

Structural shifts

The difference in the performance of fixed income and equity flows also reflects continued changes in the architecture of the funds market.