ETF Investors Favour Emerging Markets in 2018

Investors scaled back their ETF purchases in March, but in the first quarter of 2018 there were some clear favourite areas of focus

David Brenchley 17 April, 2018 | 7:58AM

Shanghai, China, ETF flows, emerging market equities

Emerging market equity exchange traded funds (ETFs) saw the most inflows in the first quarter of 2018. Investors paused purchases in March after a return of stock market volatility earlier in the year.

Overall, net inflows into ETFs by European investors saw a significant decline, to €367 million from €7.4 billion the previous month. Over the course of the year, flows into equity products fell from over €12 billion in January to €565 million in March.

Still, during the first quarter, investors pumped more than €18 billion into equity-related ETFs, a 10-year high. Fixed income ETFs saw net outflows in March, for the first time since December 2016, though overall in the first quarter €1.4 billion of money flowed in.

Emerging Market Equities Lead the Pack

A deeper look shows the Global Emerging Market Equities Morningstar Category came out top in Q1 at €3 billion, closely followed by US Large-Cap Equities at €2.7 billion. Unlike many others, both categories held up in March, too. In fact, emerging markets saw an increase of a third at just over €1 billion.

Morgane Delledonne, ETF investment strategist at BMO GAM, notes that emerging market equities are currently trading at a 20% discount to developed markets, “which is quite appealing for investors”. The backdrop is sound, too, she adds, with no hard landing in China, rising commodity prices and better fundamentals continuing to come through.

The Morningstar Bronze rated iShares Core MSCI EM IMI ETF (EIMI) has taken the most cash from investors, at €973 million quarter-to-date.

One category that did not hold up in March was Sector Equity Financial Services, which has seen the third-most net inflows so far this year at €1.9 billion. After more than €2 billion went into financial services-oriented funds in January and February, €303 million of that was withdrawn last month.

Banks have been a key area for investors to play rising interest rates, with names in the sector obvious beneficiaries as higher rates mean higher net interest margins. Improved balance sheets are positive, too.

But it was European banks in particular that bore the brunt of waning investor demand in March, with the iShares EURO STOXX Banks 30-15 ETF (EXX1) and SPDR MSCI Europe Financials ETF (FNCL) seeing €283 million of net outflows.

Michael Browne, manager of the Legg Mason Martin Currie European Absolute Alpha fund, notes the struggles banks in Europe have currently, saying lending is the only weak area on the continent currently. “Banks are growing their lending books to companies at just 2% and to consumers at 3%, no faster than nominal GDP,” he explains.

Elsewhere, USD Government Bond ETFs and Japan Large Cap Equity ETFs took in €1.5 billion each. That said, again, Japanese equities saw outflows in March.

John Husselbee, head of multi-asset at Liontrust, says Japan – along with Europe and emerging markets – is still screening as cheap and has been for some time. However, “it’s one thing scoring those markets; it’s another thing actually buying into those markets at prices that seem attractive”, he counters.

Husselbee suggests Japan’s market may have “got ahead of itself”, after a sharp move up post Shinzo Abe’s successful snap election. As a result, he’s reduced his exposure to the country.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
iShares Core MSCI EM IMI ETF USD Acc27.94 USD1.01
iShares EURO STOXX Banks 30-15 (DE)10.90 EUR0.13
Legg Mason MC Eurp AbsAlp A PFGBPHDis(A)14.78 GBP0.27-
SPDR® MSCI Europe Financials ETF EUR55.03 EUR0.47
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk