European ETFs recorded net capital inflows for the first time in five months: a trend reversal or a temporary window?
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 it was in February that the escalation of the conflict between the US and Iran began, which triggered a massive outflow of funds from risk assets. Current data indicates that investors are beginning to reconsider their preferences in favor of the European market.
The Return of Risk Appetite
The key driver has been improved corporate earnings and lower energy prices. This makes Europe an attractive haven for those seeking protection from the volatility prevailing in the US technology sector. In my assessment, we are witnessing a classic capital rotation: investors are locking in profits in overheated IT assets and shifting funds into more undervalued and stable European companies.
BlackRock confirms this trend: their products focused on European equities attracted $4.4 billion in July. The asset manager directly links this inflow to the shift of funds from chip manufacturers to less risky assets. The sell-off in global semiconductor giants' stocks observed last month has served as a catalyst for investors seeking new entry points.
Fundamental Support
Strong quarterly results from European companies have only reinforced this trend. Companies in the Stoxx Europe 600 index are poised to show a 22% year-on-year profit growth for the second quarter — the best result since 2022. Banks stand out in particular: BNP Paribas increased its quarterly profit by a third, while UBS posted a record figure, rising 17% thanks to successful trading operations.
Against this backdrop, banks are improving their forecasts. UBS raised its year-end target for the Stoxx 600 from 630 to 690 points, implying a growth potential of about 5% from current levels. Goldman Sachs analysts also remain optimistic, projecting a 168% rise in shares of British green energy developer Ceres Power and a 102% gain in German defense conglomerate Rheinmetall over the next 12 months.
Records and Warnings
The Stoxx 600 index has risen 10.7% since the start of the year, hitting an all-time high of 663.4 points. Germany's DAX, the UK's FTSE 100, France's CAC 40, and Spain's IBEX have also reached record levels.
However, not all analysts share this optimism. Specialists at Societe Generale expect the Stoxx 600 to decline to 600 points, while TFS forecasts a 9% drop — to 585 points. This serves as a reminder that the current rally may be excessive and vulnerable to a correction.
My view: The return of capital to European ETFs is a positive signal, but I would not rush to call it the start of a sustained bull trend. The market is still pricing in a soft landing for the economy, and any tightening of central bank rhetoric or a new geopolitical shock could quickly reverse the flow of funds. Investors should remain cautious and diversify their positions rather than chase record highs.