European Investors Begin to Respond to Inflation Threat

May 26, 2021 — London

Inflation-linked bonds attract investor attention

As the COVID-19 vaccination rollout gathers pace and businesses reopen, Europe’s investors are considering 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, notes Cerulli Associates. Half of the private banks Cerulli surveyed believe that protection against inflation is one of the most important goals for clients, topped only by risk management (54%) and wealth preservation (54%).

“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 €4.3 billion (US$5.2 billion) in 1Q 2021, compared to outflows of €0.5 billion in the three months from April to June last year following the peak of the coronavirus outbreak in Europe,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli.

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

Zumbo points out that investors also have other indirect tools at their disposal to help hedge against rising prices. “Commodities, including gold, are often favored as investors go into defensive mode,” he says.

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 (ETF) issuers Cerulli surveyed expect demand for metals-based ETFs to grow during 2021/22.

Other Findings:

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

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Note to editors

These findings and more are from The Cerulli Edge—European Monthly Product Trends, May 2021 Issue.

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