The European exchange traded products market has attracted net inflows of €10.4 billion in Q3 2014, bringing the total for the first nine months of the year to €33.4 billion. The combination of net inflows and capital appreciation has brought assets under management in ETPs up to €360 billion from just over €300 billion at the end of 2013.
Overall, the data are positive. With three months left to the end of the year, net inflows are above the full-year totals for each of the previous three years and AUM are handsomely up. And yet, the third quarter data came with of a warning. Indeed, for the first time in 2014, the European ETP market experienced a net monthly outflow in September. Totalling just over €2.5 billion, the September figure put a sudden halt to what had become a rather punchy run in terms of monthly net inflows.
The analysis of the data shows that net outflows in September were largely concentrated in two equity market categories, namely Germany and Eurozone large-cap. This indicates that investors responded to the stream of negative economic data over the period, particularly so from Germany, by unwinding long equity positions.
Seasonal factors seem to have played a role in the recorded fall in German GDP in Q2. However, even accounting for a potential technical rebound in Q3, the fact is that short-to-medium term growth expectations for the Eurozone’s largest economy – and hence for the Eurozone as a whole – have been downgraded. And this time, the reason for the downgrade goes beyond the drawbacks of self-inflicted fiscal austerity. Indeed, growth prospects for the world as a whole have been scaled back, which cast a dark shadow over Germany’s export-focused growth strategy.
The question is whether this bodes badly for the ETP market in terms of flows for Q4. There is no clear-cut answer. It is a fact that the ETP market in Europe does remain heavily biased to equity market exposures, and within these, plain vanilla large cap is particularly popular. As such, ongoing macro negativity may well lead to further unwinding (i.e. outflows) of large-cap equity ETP holdings in the remainder of the year.
However, money flowing out of equity ETPs doesn’t just disappear. Investors have to find alternative accommodations for it. This is when the breadth of asset class choices available in the ETP market at comes into play. Indeed, at present it is fairly easy for European investors favouring ETPs to build entire portfolios covering most asset classes. The choice within equity itself is quite remarkable, with investors able to discriminate by size, sectors, country and regions or strategies such as value, growth or dividend. The same goes for fixed income, commodities and alternative asset classes – for example real estate.
It is perfectly feasible to engage in portfolio asset re-allocation without abandoning ETPs. As such, it is not a given that outflows in equity ETPs do necessarily imply a negative flows trend for the entire ETP market. An altogether different issue is whether the macro backdrop leads investors to temporarily re-allocate to just cash. That could indeed be a problem in terms of the overall net flows trend in Q4, though not just for ETPs but for the investment fund market as a whole.
