Risk-appetite returns with investors’ eyes wide open
Key takeaways
European ETF inflows hit US$28.7 billion, reflecting strong risk appetite amid a 6% equity market rebound.
Flows were more diversified across US, Europe, and Emerging Markets, with European bonds leading fixed income interest.
From tariffs to duration risk and de-dollarisation, investors are rethinking strategies—global equity, floating rate instruments such as AAA-rated CLO notes, and gold are gaining attention.
Recapping May
Overall, May was a strong month for the European ETF market featured a broadening of equity demand, with investors looking beyond global and US exposures to Europe in particular. Europe was also the prevailing theme in fixed income, where Euro govies and European corporate bonds accounted for half the net inflows.
European ETF investors were in no mood to “sell in May and go away”. They were big buyers, with risk appetite reflecting the 6% bounce in equity markets. That’s not the whole story, however, with a closer look at the monthly flows uncovering a possible evolution in investment strategies.
May’s net flows of US$28.7 billion, marked a sharp improvement from April and surpassed the record-breaking monthly average of the past year. Equities continued to lead the way, with 71% of net inflows, while fixed income exposures gathered more than 28% of flows. Gold and other commodities also finished the month (just) in positive net territory.
Global equities once again took top spot on the monthly flows table, but overall equity demand was more widespread across exposures to the US, Europe and Emerging Markets.
On the fixed income side, Europe emerged as the clear favorite for bond investors. Euro government and corporate bonds attracted nearly half the total net fixed income flows in the month. The German economy appears attractive on a relative basis, and together with select other European countries, could provide potential ‘safe-haven’ characteristics for bond investors looking to diversify away from US Treasuries.
Diversification is the answer to tariffs
Enormous uncertainty remains around where US tariff rates will settle but markets have recovered as the expected rate has come lower. Ongoing shifts in trade restrictions and relationships are likely to prompt companies to diversify and change their supply chains. Investors, too, should consider a more diversified approach, expanding beyond the US with global equity ETFs.
Long and windy road with duration risk
For much of the past two decades, duration was not a risk but rather a steady contributor to returns as bond yields fell. However, 2022 served as a wakeup call, showing investors clearly that supply and inflation shocks means duration can once again be a risk to portfolios. We think investors should be more mindful of supply shocks and duration risk now. In our view, low duration or floating rate instruments such as AAA-rated CLO notes could help.
De-dollarisation concerns = diversification
Ongoing debates about the evolving global monetary system, the ‘safe-haven’ status of the US dollar, and the role of gold are prompting investors to reassess which haven assets are best suited for their portfolios. Gold, commodities, and cryptocurrencies may benefit from this trend.
