Inflows into European assets jumped in the week before the European Central Bank’s announcement that it officially starts its quantitative easing programme on Monday.
Europe is “the consensus darling” but also “the crowded trade,” as inflows have been the heaviest since December 2008, according to a report by Bank of America Merrill Lynch.
In the week that ended on March 3, $4.3 billion went into European equity funds, which recorded their eighth straight week of inflows.
Meanwhile, U.S. equity funds were flat. But year to date, they lost around $39 billion – while European equity funds gained more than $30 billion in the same period.
Overall, risky assets were the clear winners in the week before the ECB meeting, with equity funds saying $7.1 billion of inflows in total, of which most were via exchange trade funds: $6.9 billion.
Bonds also saw $5.7 billion inflows in the week, the ninth in a row of inflows for the asset class. However, for investment grade bond funds it was the 63rd straight week of inflows – they saw $5.1 billion going in this time. High-yield bond funds saw $2.4 billion in inflows.
Emerging market debt funds also saw inflows, albeit relatively modest at $700 million. It was their fifth straight week of inflows.
Analysis into emerging market assets flows by RBS shows that inflows into emerging markets fixed income funds eased from 0.47% of assets under management (AUM) in the prior week to 0.28% of AUM.
The largest positive injection since June last year was recorded in hard currency funds, at 0.91% of AUM, while local currency debt funds saw outflows of 0.19% as currencies depreciated.
Geographically, Latin America saw inflows of 0.33% of AUM, slower than the previous week’s 0.47%, while inflows into Asia fell to just 0.08% of AUM from 0.29% in the week before.
The only region where inflows remained constant was emerging Europe, with 0.38% of AUM. This is due to the region’s proximity to the eurozone, which is boosted by the ECB’s quantitative easing.
Emerging market equities have seen inflows too. Emerging market equity funds saw positive flows for the fourth week in a row, although modest at 0.03% of AUM.
Cumulatively, this means inflows into emerging market equities have been 0.35% in the previous four weeks — an improvement following almost 12 uninterrupted weeks of outflows.
Again, emerging Europe was the strongest of the emerging markets, but even there inflows were lower, at 0.19% of AUM from 0.25%.
Emerging Asia saw weak flows of just 0.03% of AUM, while Latin America remained in the red, with 0.11% of AUM flowing out of equities.
With the ECB starting its sovereign bond purchases from the eurozone this week, many analysts fear that the central bank will soon run out of bonds to buy.
This is because, while in the US the budget deficit was running at more than 10% of gross domestic product when the Federal Reserve was buying government bonds, in the eurozone the deficit is around 3% of GDP.
The ECB cannot buy government debt issued for the sole purpose of financing a higher budget deficit, as it is forbidden by law to do so.
This means the only way the ECB’s QE will work is if the euro’s depreciation continues, boosting eurozone exports and attracting investors to its cheap assets.
If this does indeed happen, expect capital flows to continue on their current path for a while.