European ETFs recorded capital inflows for the first time in five months: a trend reversal or a temporary window?
In July, European exchange-traded funds (ETFs) demonstrated a net capital inflow, marking the first such event since late February. It was then that the escalation of tensions between the US and Iran triggered a massive outflow of funds from the region's stock markets. The current reversal signals a shift in sentiment among institutional investors, who appear to have begun reassessing their strategies in favor of European assets.
The Return of Risk Appetite
The key driver was a combination of strong corporate earnings and lower energy prices. This made Europe an attractive haven for capital seeking protection from the volatility that continues to dominate the technology sector, especially amid the correction in chipmaker stocks. In my assessment, we are witnessing a classic rotational shift: investors are locking in profits in overheated growth stocks and moving funds into the more undervalued and cyclical markets of the Old Continent.
BlackRock, the world's largest asset manager, confirmed this trend, reporting that its products focused on European equities attracted $4.4 billion in July. The company interprets this inflow as a clear sign of funds shifting from risky tech giants to more balanced assets. The sell-off in global semiconductor manufacturers last month only accelerated this process, directing capital to regions less dependent on technology demand cycles.
Fundamental Support
The positive backdrop is reinforced by impressive earnings reports. 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 served as the engine of this momentum. For example, BNP Paribas increased its quarterly profit by a third, while UBS's figures rose by 17%, reaching a record level. Successful results in trading operations were the main catalyst for both giants.
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 potential upside of about 5% from current levels. Goldman Sachs analysts also remain optimistic, forecasting significant upside for individual stocks, including British Ceres Power (+168%) and German Rheinmetall (+102%).
The Stoxx 600 index has risen 10.7% since the start of the year and hit an all-time high this month, climbing to 663.4 points. Germany's DAX, Britain's FTSE 100, France's CAC 40, and Spain's IBEX also reached record levels.
My Assessment of the Situation
Nevertheless, the consensus is far from unanimous. Societe Generale expects a correction to 600 points, while TFS forecasts a 9% decline to 585 points. I believe the current inflow is more of a tactical rather than a strategic turn. Until we see sustained improvement in macroeconomic data in Europe, it is premature to talk about the start of a long-term bullish trend. Investors should closely monitor the dynamics of the banking sector as the primary indicator of the regional economy's health.