Beijing’s draconian Covid lockdowns were scrapped, clearing the way for a rebound in Chinese economic growth © EPA-EFE

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Emerging market and Europe-focused equity exchange traded funds both enjoyed their highest monthly net inflows for a year in January even as US equity ETFs suffered their first outflow since April 2022.

The flows, recorded in data from BlackRock, reflect a tentative reversal in global stock market leadership. They show Wall Street — long the pre-eminent driver of worldwide equity returns — handing over the baton as fears of a European recession recede and a weaker dollar allows emerging markets their time in the sun.

Since the start of October, the Euro Stoxx 600 index has risen 19.1 per cent and the MSCI China index 24.3 per cent, both ahead of the 16.2 per cent gain of the S&P 500. Over the same period the DXY index, which measures the US dollar against a basket of currencies, has fallen 7.9 per cent.

This prompted investors to pump $7.3bn into ETFs focused on European equity — predominantly from US investors — the highest figure since January 2022, according to the BlackRock data.

Emerging market ETFs were more popular still, attracting a net $15.9bn, again a 12-month high, with buying led by funds listed in the US ($9bn) and the Emea region ($5.3bn).

Some $7.3bn of the total went into single-country funds, dominated by China-focused vehicles, which sucked in $6.4bn, including a record-equalling $1.8bn from Emea-listed ETFs, and $2.1bn from US-domiciled ones.

Line chart of Cumulative net inflows to equity ETFs since Nov 1 ($bn) showing Wall Street no longer the only game in town

The flood of cash into China came as Beijing’s draconian Covid lockdowns were scrapped, clearing the way for a rebound in economic growth. It was the highest inflow since June last year, when Covid restrictions were previously eased and regulators telegraphed a less severe approach to policing China’s tech sector following an unprecedented crackdown.

“With the reopening in China, the end of the zero Covid policy, we see a good chance that China picks up and drives growth in emerging markets for the year,” said Detlef Glow, head of Refinitiv Lipper Emea research, who saw a range of developing economies benefiting from rising Chinese demand for commodities.

“We have seen a pick-up in demand for diversified Chinese benchmarks,” said Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the Emea region. “Investors are positioning for a broadening out of the rally.”

Chedid said the China reopening rally had so far had two phases, the first focused on the technology sector and the second a rise in broad EM buying.

He believed the latter would continue given that, globally, “financial conditions have loosened in the past month” owing to the weaker dollar and falling bond yields, despite central bank tightening.

Chedid also foresaw a third phase of the China-driven rally, involving buying of developed market companies that are positioned for renewed Chinese growth, such as household goods and basic resources stocks.

Column chart of Monthly net inflows to Emea and US-listed Chinese equity ETFs ($bn) showing Ballooning demand

Howie Li, global head of index and ETFs at Legal & General Investment Management, said January’s flows “reflect relative valuations” between regional markets.

“Dramatic monetary tightening was felt more strongly in Europe in 2022 and it would appear that the market is expecting a recession to begin soon in the US,” Li said.

“Investors have become more confident in Europe this quarter as concerns around energy prices affecting economic productivity have receded to an extent.”

Glow was unconvinced that the nascent shift towards European equities was here to stay, though. Instead, he believed many European investors simply had a structural overweight to the US after piling into technology stocks during the pandemic and were correcting this.

Expectations of more rate rises in the eurozone than the US during the course of 2023 were likely to further strengthen the euro against the dollar, rendering Wall Street a less attractive market for foreign investors, he believed.

However, Glow said: “I don’t think there’s a point where European investors think European markets have a structural advantage over the US”.

Emerging market debt ETFs also notched up their second-straight month of inflows, of $2.2bn, following on from their first outflow year on record in 2022, when $9bn went out of the door.

There were some signs of a re-risking in fixed income more broadly in January, although the picture was not entirely convincing.

Investment-grade credit ETFs saw their third-largest monthly inflow on record, with the $12.6bn they attracted the most since June 2020.

However, while high-yield ETFs also took in $2.4bn, more than reversing December’s $0.9bn outflow, this was still far less than in October and November.

Chedid believed that, instead of re-risking by moving from US investment grade to US high-yield debt, Americans were instead upping the ante by expanding into European investment grade paper.

“There is more caution around high-yield; assessing the damage in economies [from rising interest rates] is a moving exercise,” he said.

Elsewhere, the transatlantic divide in demand for “sustainable” ETFs was stark once again. Emea-listed funds took in a chunky $5.7bn, with the $3.6bn of this funnelled to equity ETFs the highest figure since July.

In contrast, $855mn was pulled from their US-listed peers, the third-largest figure ever.

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