Investors are rapidly pulling out of UK shares at the fastest rate seen in over two decades, reflecting widespread unease about the country's economic outlook ahead of the November Budget. A recent Bank of America survey, involving 165 fund managers overseeing £315 billion in assets, revealed a striking shift in sentiment. These investors are now 20% ‘underweight’ in British stocks, a dramatic fall from just 2% underweight in August. This represents the steepest exodus from UK equities since 2004, underscoring a growing fear that the UK's market and economic fundamentals are deteriorating.

Fund managers’ wariness is being driven largely by concerns about the government's fiscal stance and looming tax policy decisions. Chancellor Rachel Reeves has been warned that planned tax rises in the upcoming Budget could severely hamper efforts to revive stock market flotations this autumn. The combination of a ‘weak fiscal outlook’ and an unpopular government led to this bleak investor sentiment, with UK assets being described as the “most unloved” currently. Elyas Galou, investment strategist at Bank of America, stated that investors are increasingly treating the UK like an emerging market, reflecting a lack of confidence not only in the economic policy but also the broader financial stability of the country.

This retreat from UK stocks is part of a wider pattern of global market rotations. While UK equity allocations have plunged to their lowest since March 2024, global investors are concurrently reducing holdings in other major markets, including the US. Indeed, another Bank of America survey highlighted a record pace of divestment from US stocks amid ongoing trade tensions and recession fears. The US market, much like the UK, is facing a notable scepticism about traditional economic “exceptionalism”, with a growing number of investors expecting further dollar depreciation and a global economic slowdown.

Despite the gloom surrounding UK shares, some signs of cautious optimism have emerged recently. For the first time in over three years, the number of investors with a bullish stance on UK equities slightly outnumber those bearish, indicating a potential—but fragile—shift in sentiment. Yet this positive development contrasts sharply with the prevailing investor behaviour seen earlier this year when allocations to UK stocks were at historic lows.

The challenges facing UK equities are compounded by structural issues affecting the London stock market itself. The Confederation of British Industry has called for significant reforms, including scrapping the 0.5% stamp duty on share purchases, which critics argue drives investors towards foreign stocks at the expense of British firms. The changing landscape is reflected in notable companies choosing to list in New York or being acquired by foreign entities, further weakening London's appeal.

Fund managers remain upbeat on global equities overall, spurred by improving economic data, anticipated interest rate cuts in the US, and stimulus measures in China. Equity allocations globally have increased substantially, with a clear rotation from defensive sectors into more cyclical areas like consumer discretionary and industrials. Nonetheless, UK equities continue to lag behind, as fears about tax increases and economic stagnation dampen enthusiasm.

In summary, the UK stock market is currently facing a severe crisis of confidence, largely tied to political and fiscal uncertainties, which is driving an unprecedented withdrawal by institutional investors. Though global investor sentiment is robust and shifting towards more favourable conditions, the UK remains on investors' radar as an emerging market with many risks and few immediate positives. Chancellor Rachel Reeves faces a critical task in the November Budget to restore trust and incentivise investment before the damage to London’s financial standing becomes irreparable.

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Source: Noah Wire Services