SocGen analysts Sebastien Lemaire and Laure Genet provide insights into European market sentiment through the medium of fund flows into and out of European ETFs in their research note ‘ETF Market Signals.’

1-ETF-trends European ETFs

The bubble chart above reflects creation/redemption in terms of ‘%of AUM’ (vertical axis) and in ‘USD –Millions’ (horizontal axis) in ETPs in Europe during January 6 through January 10, 2014.

The blue bubbles represent equities and show that European, World and Small Caps Equity ETFs suffered outflows while Global Emerging Markets, Japanese and US equities received investor interest and inflows.

The brown bubbles reflect high demand for EM Government bond ETFs, Europe sovereign bonds and Corporate Investment Grade and HY bonds.

Commodity ETFs represented by the grey bubble were cold-shouldered by investors, and reflect outflows from Gold Etfs.

Flavor of the week: EM government bonds

SocGen has been bullish on EM government bonds due to attractive valuations and a brighter fundamental scenario, and investors showed a strong preference for these assets.

2-em-govt-bonds European ETFs

“Based on a combination of proprietary vulnerability and policy room indicators, our EM strategists currently favour such countries as Peru, South Korea, China and the Philippines, while avoiding India, Venezuela, the Czech Republic, South Africa, Indonesia and Lithuania,” say the SocGen analysts.

Renewed fervor for US equities

3-us-equities European ETFs

Investors acquired a fresh appetite for US equities as fears of rate hikes evaporated following disappointing employment data out of the US. The trend of redemptions during the months of August through November reversed to inflows in December and January.

European ETFs: HY corporate bonds continue bullish momentum

European HY corporate bonds had a strong year in 2013 as the sovereign debt crisis faded from the investor psyche and prospects of growth in the region improved.

Investors poured money into these bonds hoping to benefit from the ECB’s monetary easing. Corporate bond issuers in Europe therefore met with good response from investors during 2013, more so when fears of a taper by the US Fed turned to reality. The bullish trend continues in 2014, according to SocGen, with investors lapping up HY corporate bonds in the latest week.

“High yield corporate bond ETFs recorded strong inflows once again, in line with tightening spreads and yields…High yield corporate bonds started 2014 as they finished 2013: fast and furious,” says the SocGen note.