European equities enjoyed their third-best month on record in January, according to the latest data from Calastone.
The company reported in its Fund Flow Index that the sector saw inflows of £471m in the month, following December in which the second-highest inflows were recorded. It also reported that inflows to emerging market equity funds slowed to £184m, in line with the average of the last two years, but less than half November’s record inflow of £413m.
“Interest-rate bulls are creating the financial weather right now,” said Edward Glyn, head of global markets at Calastone. “The markets are convinced that disinflation will bring rate cuts earlier and faster than previously expected, especially in the US. This has driven an equity market rally, particularly among the US tech stocks whose share prices benefit most from lower bond yields.”
Inflows have surged as a result – though Glyn added: “The flipside is evaporating inflows to cautious money-market safe havens. Central banks keep trying to dampen expectations of early rate cuts but they are struggling to land the message with the markets.”
It is not all about US tech, however, with European equity funds firmly in favour too. “Investors judge that the current weakness of the European economy is already priced in and are looking beyond to the rate cuts that must follow,” explained Glyn. “The UK is also experiencing a sharp disinflation but the doom and gloom over the UK stockmarket seems firmly lodged in investors’ minds. UK equities are exceptionally cheap by historic and international comparisons, but buyers are nowhere to be found.”
The Fund Flow Index also noted a resurgence in ESG funds – though Glyn argued it was too soon to call this as a new trend after months of negativity. Nevertheless, January was the first month since last April that there were inflows to the sector.
“Outflows had swelled to £3.72bn between April and the end of the year, though they slowed to a mere trickle in December,” said Glyn. “The rebound in January was so strong that ESG equity funds enjoyed record inflows of £1.63bn during the month and were a major contributor to the strength of US and European equity fund inflows overall.”
The “renewed flurry of interest” in ESG in January should be treated with caution, he warned however, adding: “Strong markets are good for ESG inflows – particularly if the market rally is driven by US technology companies. Yet none of the bigger questions about the sector, such as the greenwashing debate, has gone away. In the UK, the FCA’s new rules on ESG fund marketing will help, but are yet to take effect. Longer term, greater clarity and better disclosure will be good for the sector, but the road is likely to be bumpy in the short term.”