Now, let’s look at areas where flows have diverged in terms of where investors are choosing to take on risk:
At the start of the year, investors put their dollars to work in emerging market (EM) equity funds. The sector attracted $12.3 billion of inflows in January and February, but in the most recent rally it has attracted just one-third of that amount. US small-cap and US mid-cap stock funds also attracted inflows at the start of the year, compared with recent outflows.
Meanwhile, funds are now flowing into a sector that many investors bypassed earlier this year – European equities. Since June, European equities have attracted $4 billion of inflows, compared with $0.2 billion of flows during the rally at the start of the year.
The flows appear to show a muted risk-on environment, where investors are taking a selective approach to risk. The reason we say muted is that these latest European flows are still modest by historical standards. For instance, European equity funds attracted $5.6 billion of inflows in July alone of last year.
The numbers remind us that risk-on is not a catch-all phrase, and market rallies come with their own shades of risk taking. But the flows are indicating that while we might not be in a vigorous risk-on environment, risk sentiment is improving among investors.
Dodd Kittsley, CFA, Director, is Head of Global ETP Market Trends Research for BlackRock.