State Street suffered net outflows of more than $7bn from its exchange traded fund arm in June as fears about a global trade war blunted growth across the ETF industry in the first half of 2018.
President Donald Trump’s decision to impose tariffs on imports from China, Europe and Canada has caused weakness across many stock markets. This has led to a marked slowdown in new business for asset managers globally.
Worldwide inflows into ETFs (funds and products) dropped to $223bn in the first half of 2018, down more than a third on the same period last year, according to ETFGI, a data provider. The sharp decline in growth comes after four consecutive years of record inflows into ETFs, which have attracted the bulk of new money in the global asset management industry.
Hope of a swift resolution to trade tensions have faded, prompting warnings from analysts.
“Suddenly the world is facing the most serious outbreak of protectionism since the 1930s,” said Dario Perkins, a managing director at TS Lombard, the London-based economic consultancy. “Protectionism didn’t cause the Great Depression but it certainly prolonged it.”
Investors have pulled billions from funds linked to emerging markets and European equities, which are seen as vulnerable to damage from a trade war.
State Street, the New York-listed bank, registered outflows of $7.2bn from its ETFs last month alone, dragging this business into negative territory by the end of the first half.
BlackRock also weathered heavy ETF outflows of more than $5bn in June. The world’s largest asset manager has attracted $52.7bn in new ETF business this year, down 63 per cent on the first six months of 2017.
Christopher Harris, an analyst with Wells Fargo in New York, said overall new business growth for BlackRock was running below the company’s 5 per cent target, due mainly to the slowdown in ETF inflows.
Wells Fargo has trimmed its 12-month target for BlackRock shares, which were trading at just over $508 on Friday, from $550 to $545.
Wei Li, head of iShares Emea investment strategy at BlackRock, said investors were making greater efforts to build resilience into portfolios as a result of the combination of trade tension and moves by US and European central banks to normalise monetary policy.
“Gold ETFs have attracted steady inflows until very recently even though the price hasn’t performed strongly this year and there has been a huge appetite for US government bond ETFs following increases in short-term rates,” said Ms Li.
New ETF business for Pennsylvania-based Vanguard, the nearest rival to BlackRock, dropped 48 per cent to just over $43bn in the first half.
WisdomTree, the New York-listed manager, has also been hit by first-half withdrawals of $4.2bn. WisdomTree’s shares have fallen 28 per cent this year.
In Europe, Amundi, UBS and DWS, the asset management arm of Deutsche Bank, have all seen a slowdown in ETF growth after political tensions in the UK, Italy and Germany led investors to retreat from equity markets.
ETF inflows for Lyxor, the Paris-based asset manager, sank 96 per cent to just $233m in the first half.
“There were massive outflows from ETFs linked to European equities in the second quarter. These were offset in Europe by inflows into US equity, commodities and safe haven government bond ETFs,” said Arnaud Llinas, head of ETFs and indexing at Lyxor.
Mr Llinas said he believed the slowdown was a blip. “We have never before had as many conversations with potential clients including private banks and wealth managers as so far this year,” he said.
Investors’ appetite for risk, however, could be further damaged by Mr Trump’s decision this month to impose tariffs on an additional $200bn of importsfrom China.
Kevin Gardiner, global investment strategist at Rothschild wealth management, said it was an “uncomfortable but undeniable fact” that Mr Trump was right to complain about trade imbalances. “The US has been one of the most open economies on the planet and the playing field [on trade] is not level,” he said.