GOODBYE SUMMER, HELLO VOLATILITY

Market snapshot

Despite the volatility to start the month of August, global equities ‘fully’ recovered from the technically-driven sell-off. The S&P 500 ended the month up 2.4% and ACWI ex-U.S. higher by 2.9%. Although we see the probability of a U.S. recession to be relatively low, the risk/reward of adding to equities doesn’t look particularly favorable. The softening macroeconomic backdrop may continue to stoke volatility, especially as we move towards the U.S. election in November. We advocate for taking down U.S. beta, look towards regional diversification, and focus on portfolio income.

Time to get active

Active ETFs have garnered over US$200bn in net inflows year-to-date – more than double 2023’s total figure. The flows come in tandem with new product launches, with over 200 active ETFs hitting the market this year alone. The pace of inflows has also been notable relative to index ETFs. Active ETFs saw ~27% growth in AUM this year, as opposed to just 7% for index ETFs.

We've seen clear preference from investors within the active equity ETF space. Large-cap growth ETF flows are predominantly concentrated in index funds (91% index, 9% active), while large-cap value ETF flows are significantly more active in nature (51% index, 49% active). This stems from a combination of product launches and investors looking for cheaper active within a trusted wrapper.

Another emerging trend is the usage of active fixed income ETFs. Investors look to be more inclined to using an active manager, in their fixed income allocations over their equity allocations. To read more about how BlackRock sees the future growth of the active ETP industry, read our whitepaper Decoding Active ETFs.

Divvying up emerging markets

It’s an asset allocation trend we’ve talked about before: separating out Chinese equity exposure from the broader emerging market complex as a way to manage risk. In August, we saw this trend reassert itself in a clear fashion: broad emerging market funds saw ~US$1.4bn in net outflows, while emerging markets ex-China funds gathered ~US$1.0bn in assets.

This coincides with the broader shift we’ve seen from asset allocators. Over the past three years, broad emerging market ETFs have shed US$6.0bn in assets, while emerging markets ex-China have added US$13.6bn. In other words, there is still appetite out there for emerging markets, but investors are shying away from China itself.

Much of this trend can be chalked up to two drivers: geopolitical tensions globally and Chinese economic weakness. The former – a key megatrend in the post-COVID world – will reshape supply chains, trade deals, and the flow of commerce globally. As a result, we’ve seen increased investor interest in other APAC emerging markets, such as India and Vietnam.

The latter – which has seen Chinese real estate, domestic consumption, and export-driven manufacturing suffer - is an economic reality policymakers will be forced to deal with, the ramifications of which will be felt globally.

The barbell is back

Fixed income ETPs managed to earn a new accolade this summer: the global industry saw over US$60bn in inflows in July alone, hitting a new monthly record for the ETP asset class. August saw the trend continue, marking the largest three-month stretch of fixed income ETP inflows ever.

Broadly, fixed income demand stemmed from investors both seeking ballast amid the early month’s volatility and then taking down equity risk once markets recovered from the technical drawdown. Interestingly, we did not see any drawdown in cash levels: total assets in money market funds climbed again to a new record of US$6.3tr.

BlackRock investors have noted that they expect to see this rotation away from equities and into bonds as a natural move given the slowing global growth backdrop. As central banks start to move their focus away from inflation and towards economic growth, we’ve seen bonds reemerge as ballast within investor portfolios. This constitutes the shift from ‘bad data is good for stocks’ (as it means inflation is slowing) to ‘bad data is bad for stocks’ (as a growth slowdown may overshoot).

Although we remain broadly constructive on global growth, we do see room for investors to look for portfolio hedges and focus on earnings income across asset classes.