Trade tensions cause $2 billion EM outflows in June

BlackRock’s latest EMEA ETP monthly flows report highlights the outflows in June from emerging markets as investors head to the US in pursuit of quality.

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European equity exchange traded products (ETPs) hold the mantle for the largest outflows so far this year, according to BlackRock’s latest ETP EMEA monthly flow commentary, with $12.75 billion out from the start of the year to the end of the week (starting 6 July 2018). In June, overall equity inflows reduced to $585 million, while emerging market (EM) equities saw $2 billion in outflows. This followed a weak May for EM flows, which saw the biggest monthly outflow number since December 2014, when $2.2 billion was lost. European equity flows have also been suffering, with $1.1 billion of outflows in June.

According to BlackRock’s analysis, this has resulted in four months in a row of withdrawals for the first time since early 2016.  BlackRock notes that the last time that total equity inflows were this low, there was a similar trend of investors shunning EM and European equities and buying US equities instead. The investment manager argues that growing trade tensions between the US and China are weighing on market sentiment.

The flight to quality trade has spurred demand for US equities, which attracted $3.2 billion of inflows in June. BlackRock notes that flows from EMEA investors have been consistently strong, with money entering US stocks since June 2017, undeterred by the market volatility.

In the fixed income market, flows have been significantly more positive than in equities. In June, $514 million came back into rates ETPs, following outflows of $419 million in the previous month. BlackRock says that rates ETPs have been the most popular fixed income exposure this year, gathering $5.3 billion with a skew towards the end of the first quarter (Q1). The investment manager attributes the inflows into rates in June to buying in intermediate—term rates ETPs with a duration of between two and ten years, while short—term rates ETPs were the most popular in Q1 of the year. High—yield saw $130 million of outflows in June, with year—to—date flows amounting to $1.8 billion. April was the only positive month for high—yield so far this year, with $90 million entering the market segment across the month. BlackRock argues that rising rates in the US has created opportunities in the fixed income space such as investment grade, allowing market participants to move away from riskier high—yield trades.

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