Mounting tensions in the Middle East have spurred a significant shift in investment strategies, with investors pulling capital from US markets and seeking opportunities in Australia, Europe, and Asia. Analysis from UBS reveals that US-focused exchange-traded funds (ETFs) experienced minimal net inflows during the initial weeks of the conflict, contrasting with robust flows into international markets. This trend accelerated in March, with approximately $US29.7 billion withdrawn from US equity funds, according to Bloomberg.
The rotation away from US assets, initially triggered by former US President Donald Trump’s tariffs, has intensified amid growing global uncertainty. UBS strategist Gerry Fowler notes that the magnitude of these outflows is unprecedented. He suggests that the weakening US dollar has further incentivised investors, including those in the US, to seek refuge in non-dollar denominated assets. While demand for ETFs in other regions has remained strong, US ETFs have seen increased selling pressure.
Vanguard, a major ETF provider, is experiencing a surge in inflows, poised for its best month on record. Notably, around $675 million has flowed into Australian equity funds, surpassing the $421 million allocated to international equities with a 72 per cent weighting to US stocks. Duncan Burns, Vanguard’s APAC chief investment officer, observes that investors are largely maintaining discipline during market downturns, often capitalising on dips rather than selling off holdings.
However, sustained high energy prices, exacerbated by geopolitical risks, could potentially undermine these inflows, especially for oil-importing nations like Australia. The risk is compounded by Australia’s failure to meet its oil store obligations under the International Energy Agency. Similar concerns exist for Europe, with the potential for market disruption if rising oil prices continue. Despite these risks, firms like Talaria Asset Management are identifying opportunities in sectors such as US insurance and energy, capitalising on market volatility.
