Equities’ Year?

Has 2010 really been equities’ year in Europe’s exchange-traded product market?

According to the last European exchange-traded product weekly report of the year from Deutsche Bank, equities have received the lion’s share of net new cash inflows from investors in 2010.

Inflows to equity ETPs so far in 2010 have totalled €21 billion, while fixed income ETPs have received €6 billion in new cash and commodity ETPs €7 billion.

Equities are also finishing the year with respectable gains – the Stoxx Europe 600 index is up 11.3% in the year to date, while the S&P 500 index had gained 12.7% in price terms by the close of business on December 23.

After some mid-year nerves, the major averages have staged a strong rally into year-end, boosting confidence.  My online copy of the Financial Times this morning tells me that we’ve experienced the strongest December stock gains in a decade, while “hopes for a US recovery are encouraging investors to pull billions of dollars out of bonds.”

“We are now at the cusp of a change in expectations among investors, with asset allocators believing equities will return far more next year than credit or fixed income,” the FT quotes Mislav Matejka, equity strategist at JPMorgan, as saying.

However, when this year’s cash flows to the respective asset classes are measured against the sizes of the sectors concerned, it’s investor buying of commodities that stands out.  Equities’ €21 billion of ETP inflows are around 19% of the assets invested in that sector of the market, not that different from the flows allocated to fixed income when measured in percentage terms (fixed income’s €6 billion of new cash represents 17% of the overall assets invested).

Commodity ETPs’ €7 billion of inflows, meanwhile, measure up as 33% of the assets invested in that sector.  Digging a level deeper, it’s again precious metal trackers that are the highlight: they’ve received almost €6 billion of that €7 billion total.

Looking down a table of the year-to-date performance of raw materials, it’s clear that commodity investors have benefited from another bumper year, certainly a better one than that experienced by holders of equity index trackers.

Focussing on spot price changes only, here are several bits of evidence of commodity price inflation in 2010 that catch the eye:  palladium is up 187%, silver 71%, cotton 100%, Arabica coffee 65%, corn 51%, copper 34%, Brent crude oil 34%.  And, last but not least, gold has gained 27% this year, its ninth consecutive annual increase.

So while 2010 has been good for equities, following through from 2009’s dramatic post-March rally, it’s been commodities’ year.

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