European ETFs recorded capital inflows for the first time in five months: a trend reversal or a temporary lull?
In July, European exchange-traded funds (ETFs) recorded net capital inflows for the first time since late February. This is a landmark event, given that this is when the escalation of the conflict between the US and Iran began, which triggered a massive outflow of funds from risky assets. The current reversal signals a shift in sentiment among institutional investors, who are beginning to reassess their strategies.
The Return of Risk Appetite
The key driver has been the recovery of interest in the European market amid strong corporate earnings and lower energy prices. This makes the region an attractive alternative for those seeking refuge from volatility in the US technology sector. In my estimation, we are witnessing a classic rotational shift: investors are locking in profits in overheated chipmaker stocks and moving funds into more undervalued and stable European assets.
BlackRock confirms this trend, reporting inflows of $4.4 billion into its products focused on European equities. The asset manager directly points to a shift of capital from semiconductor producers to less risky sectors. This is also supported by data on the Stoxx Europe 600 index: companies within it are poised to show a 22% year-on-year profit growth for the second quarter—the best result since 2022.
The Banking Sector—A Growth Engine
Financial institutions stand out in particular. BNP Paribas increased its quarterly profit by a third, while UBS posted record results, raising them by 17%. Both banks owe their success to trading operations, which indicates high activity in the markets. Optimism is further reinforced by forecasts: UBS raised its target level for the Stoxx 600 to 690 points, implying a growth potential of about 5% from current levels. Goldman Sachs also maintains a bullish stance, highlighting British Ceres Power (+168%) and German Rheinmetall (+102%) as favorites over a 12-month horizon.
The Stoxx 600 index has risen 10.7% since the start of the year and hit an all-time high this month, reaching 663.4 points. Germany's DAX, the UK's FTSE 100, France's CAC 40, and Spain's IBEX have also reached record highs. However, not all analysts share the euphoria. Societe Generale expects a correction to 600 points, while TFS forecasts a 9% decline to 585 points.
My verdict: The inflow of capital into European ETFs is an important signal, but not a reason for unbridled optimism. The market is at highs, and consensus forecasts are beginning to diverge. I would view the current dynamics as a medium-term opportunity, but with mandatory consideration of correction risks. Investors should focus on quality assets with strong balance sheets rather than chasing index returns at the peak of the cycle.