Investors shift focus from US to eurozone

Growth and policy divergences mean investors shift focus from US to eurozone

• January sees net outflow from US-exposed equity ETFs amid growth worries
• Investors flock to eurozone-exposed equity and fixed income ETFs
• Japan sees renewed investor interest amid signs of recession ending

Exchange traded funds (ETF) provide investors with easy, liquid exposure to various markets. Fund flows consequently provide a valuable and very timely insight into how investor appetite towards different markets is changing. Recent data show a marked change in sentiment away from an exposure to US markets, and to a lesser extent UK equities, towards the eurozone and Japan in January.

So far this year, US-exposed equity funds have suffered a $13bn outpouring, the first such outflow since May and representing a marked contrast to a record net inflow in the fourth quarter. Overseas investors have meanwhile pulled a net $27m from UK-exposed funds so far in January, most of which were equity-focused, building on a record quarterly net outflow in Q4.

Eurozone-exposed ETFs have so far this year seen a $4.8bn net inflow into fixed income funds and a further $1.8bn inflow into equity funds.

This shift in sentiment most likely reflects a number of factors, including signs of slower economic growth in the US and the UK, which will hit corporate earnings, while at the same time the ECB's announcement of €60bn monthly asset purchases and signs of stronger economic growth have reinvigorated investor interest in being exposed to euro area equities, as well as sovereign debt. It's notable that the interest in investor sentiment in the eurozone is focused on currency-hedged ETFs, indicating that growth is expected to be fuelled by a weakened currency as QE drives the euro lower. Similarly, investors have also moved into US fixed income funds, reflecting recent bond market gains.

Sentiment has also improved towards Japan, reflecting the fact that the country appears to have pulled out of the mini recession that was induced by last April's sales tax rise. Ongoing stimulus and the weaker yen should also foster stronger earnings growth. ETFs have seen a resumption of inflows in November and December, with the latter showing the largest monthly gain for 18 months. Strong inflows have also continued to be seen in January so far, currently totalling $2.3bn against December's $4.1bn rise.

China-exposed ETFs have meanwhile seen an exodus of investment finds, though this in part reflects investors now being able to invest directly in mainland A shares via the Shanghai-Hong Kong Connect as well as concerns about the economic slowdown.

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