European investors split over inflation threat response

Europe's investors are split on how to respond to the prospect of higher inflation caused by a surge in spending as pent-up demand is released when lockdowns are lifted, according to the latest issue of The Cerulli Edge—European Monthly Product Trends.

Inflation in the EU is forecast to be 1.9% in 2021 and 1.5% next year, edging toward the European Central Bank's 2% target, an upper limit also set by many other national authorities, including the Bank of England.

However, opinion is divided between cautious inflation watchers and those who believe that any rise will be short lived, Cerulli Associates' research revealed.

Half of the private banks surveyed believed that protection against inflation was one of the most important goals for clients, topped only by risk management (54%) and wealth preservation (54%).

Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli said: "Investors can protect against inflation in several ways, directly or indirectly, and one area of the market that is already starting to see increasing buyer action is the inflation-linked bonds market.

"Data from Broadridge shows that net new flows into funds within the category surged to €4.3bn (US$5.2bn) in 1Q 2021, compared to outflows of €0.5bn in the three months from April to June last year following the peak of the coronavirus outbreak in Europe."

On the other hand, net bond fund sales across Europe have fallen for three consecutive months, including March's outflows of €11.2bn.

Zumbo pointed out that investors also have other indirect tools at their disposal to help hedge against rising prices. "Commodities, including gold, are often favoured as investors go into defensive mode," he said.

Although activity in these inflation-hedging sectors has so far been muted, individual funds have seen a pickup in demand.
Half of inflation-protected funds in Broadridge's top 10 ranking based on net new flows in 1Q 2021 were tied to commodities.

Moreover, some 49% of the exchange-traded fund issuers Cerulli surveyed expect demand for metals-based ETFs to grow during 2021/22.

Further findings:

• Passively managed funds in Europe attracted €18.2bn of net inflows during March to reach assets under management (AUM) of €2.3trn. AUM grew by 5.2% month-on-month, whereas net sales fell by 9.7%. ETFs recorded net inflows of €12.2bn for the month. Index-tracking fund sales surged in March, gathering net inflows of €6.0bn, up 48% on the previous month.
• Equity funds were the best-selling asset class in 1Q 2021, with net inflows of €89.8bn, followed by bond funds with €24.8bn and mixed-asset funds with €11.1bn. Global equity remained the Europe's best-selling sector. Thematic funds recorded positive flows in March (€11.9bn), taking their 1Q net inflows to €51.6bn. Within the themes, funds that focus on climate change/transition recorded the biggest net inflows for the first three months of 2021.