Investors have been casting their nets far and wide in both risk-on and risk-off asset classes over 2016, according to Wei Li, head of investment strategy at iShares EMEA. 
It has been a strange year for investors, with equities, government bonds, gold and other asset classes rising in tandem despite headwinds such as Brexit and lacklustre economic growth.
Between the start of the year and 26 September, gold rose 43.92 per cent, with the oil price also up 40.32 per cent. Global equities and bonds both increased by 20.36 and 24.78 per cent respectively.
Performance of indices in 2016
Source: FE Analytics
This cohesion has led to some investors being unsure as to where to invest, with the perception that assets rising together will also likely fall together.
However, Li says some interesting inflow and outflow patterns have formed this year in the index tracking space, with investors looking to a range of asset classes previously unloved in an effort to diversify their portfolios.
Gold
We start with gold exchange traded product (ETPs), which have seen “steady clips since the beginning of the year especially at times of volatility” such as the Brexit vote and the potential slowdown in China at the start of the year.
“After the Brexit vote there was a significant uptick in gold inflows but also at the beginning of the year when there were a lot of concerns around China and the currency devaluation and around oil volatility failing to find a bottom,” Li said.
“When there was so much uncertainty we saw investors just parking cash in gold.”
As the above graph suggests, the metal, which is traditionally used as a ‘safe haven’ in times of economic uncertainty, has been the best performing global asset class of those sampled this year.
“I think part of why we have seen interest for gold pick up is because interest rates are low – the opportunity cost for not holding gold has gone down a lot and investors think of gold as a potential hedge for rates and potentially for inflation,” Li said.
From January to August the asset class saw steady inflows in each month, however, this has started to slow down in September with Li noting that it was the first month this year that there has been outflows in gold ETPs.
“I think the reason investors’ appetite for gold has been somewhat subdued in September has been coming from the fact that we have seen an episode in September where market volatility was driven by rates correction and that means diversification is becoming very hard to come by,” Li said.
“So we have this situation where government bonds were going down, gold was going down and markets were going down as well, and investors looked around and said: ‘Okay it’s hard to find an exposure in a broad market sell-off and maybe gold may not diversify to the extent we expect it to’.”
Europe
Another area where investors seemingly cannot make up their minds is Europe, where iShares has seen steady, sizeable outflows throughout the year.
“I think part of this has to do with the fact that investors are increasingly starting to challenge the efficacy of central bank easing,” Li said.
Last year, inflows into the region were high as the European Central Bank stepped up its easing rhetoric and cut rates to new lows.
It also ramped up its quantitative easing programme in support of the ‘whatever it takes’ attitude taken by ECB president Mario Draghi.
“Investors bought into it and bought European equities as a vote of confidence for that,” Li said.
“But increasingly what we have seen so far this year is that just monetary policy alone is not enough to sustain confidence in the outlook of the economy,” she added.
“I think investors not buying into European equities is a reflection of their diminishing expectations for the effect implementation of monetary policy.”
The outflows are also an indication of the uncertainty surround Europe, with the Italian referendum later on this year and elections in France and Germany expected in 2017.
“We have a general rise of anti-establishment and investors probably want to take a step back and reassess the risk associated with investing in such a region,” Li said.
However, contrasting these significant outflows in European equity have been massive inflows in European credit, especially high grade, Li says.
Over the course of the year, European equities have risen 12.67 per cent while bonds have climbed 24.17 per cent, as the graph below shows.
Performance of indices in 2016
Source: FE Analytics
“I think underpinning this inflow into European credit has been about the ECB buying corporate bonds. This is literally as simple as ‘let’s try to get in there before the central bank starts buying up everything’,” Li said.
“The gap between inflows in European credit and outflows in European equities have been the widest on record as registered in global ETP space year-to-date in comparison to its history so this is really is an excellent case of how far monetary policy can go before markets start to question.”
“This is an interesting phenomenon. What this divergence in flows really goes to show is that they believe central bank policy could prop up part of the market but they don’t believe it would be effectively fed through to the real economy.”
Emerging markets
Where iShares has seen significant inflows is in emerging markets.
“I think one thing that underpins part of this pick up in interest in emerging market assets has been the perception that despite emerging markets tending to be traditionally more volatile than developed market assets but as we go into the remainder of the year and we go into next year the electoral cycle is actually more heavy in developed markets than in emerging markets,” Li said.
As the below graph shows, emerging markets have been the most popular equity asset class this year, returning 32.08 per cent in 2016.
Performance of indices in 2016
Source: FE Analytics
“A lot of the inflows that went into emerging markets actually took place after the Brexit referendum sparked this realisation on the investors’ side that emerging markets are actually somehow perceived to be safer than their developed market counterparts because they are a bit further from developed market driven volatility factors like the US election and the elections that are coming up in Europe,” Li said.
“Whether this is true or not is debatable because the trade link between developed markets and emerging markets is ever growing but I think what’s partially been driving this interesting year has been people looking at where the key-risk events are happening and deciding that emerging markets are somewhat ‘safer’.”