ETF Edge

European ETF flows signal concern about recession

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European recession priced in?

With the war in Ukraine still ongoing and the ripple effects being felt around the wider region, some investors are starting to worry about Europe sliding into recession.

Arne Noack, head of systematic investment solutions, Americas, at DWS, said the concern is starting to manifest itself in the amount of money being allocated to the region. "Year to date, we're still up, around about $100 million in flows across the market in European equity ETFs," Noack told CNBC's "ETF Edge" on Monday. "However, over the past two weeks, flows have turned significantly negative."

Noack's firm runs the Xtracker suite of ETFs: Xtrackers MSCI EAFE Hedged Equity (DBEF), Xtrackers MSCI EAFE High Dividend Yield Equity (HDEF) and Xtrackers MSCI Europe Hedged Equity (DBEU).

Of course, when investing overseas, exchange rates must be taken into account and the currency-hedged offerings are providing some down-side protection. "Currency hedging or not currency hedging really matters," Noack said. "Equity markets are down but so are currencies against the U.S. dollar. So when we, in particular, look at the euro zone ETFs, the unhedged part underperforms the hedged part by almost 6% year to date."

Andrew McOrmond, managing director at Wallachbeth Capital, in the same segment wholeheartedly agreed, "You absolutely must hedge … and you're keeping the same exposure, you're just hedging, which you do in a volatile market."

With most of the world vocally opposed to the invasive of Ukraine, Russia's historical alliance with China has caused knock-on impacts to that country as well in terms of investor sentiment.

But because the investment space in China is so massive, there has been a recent diversion in performance between regionally focused ETFs like the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) which is down much less than the benchmark iShares MSCI China (MCHI).

Noack explained, "With the SEC and the ongoing discussion around financial disclosure requirements here in the U.S and the emerging talk of delistings, some of those companies are receiving worse treatment from an investor sentiment standpoint than on-shore domestic Chinese equities. So that kind of differentiation can explain some of the performance differences we've seen."

But McOrmond is blunt with his take on investing in China right now, "As an individual investor, do you really want to sell your Netflix and take a big bet on China right now? I think there's a lot of risk in that."

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