Investors continued to pull billions from UK equity funds in September, underscoring persistent concerns around the country's economic outlook despite the stock market hitting record highs. According to data from funds network Calastone, UK-focused equity funds saw £692 million withdrawn last month, marking an increase from £657 million in August. This ongoing outflow contributes to a long-term trend of declining investor confidence in UK equities that has spanned over four years and is described by Edward Glyn, head of global markets at Calastone, as ‘seemingly unstoppable.’

This investor exodus is occurring even as the London stock market reached an intra-day record peak of 9516 before closing near that level, illustrating a disconnect between market performance and investor sentiment. Glyn noted that some investors had recently been tempted back by the relative cheapness of UK stocks and positive market moves but that such optimism seems to be fading again due to a combination of sluggish economic growth, mounting government debt, an upcoming Budget fraught with uncertainty, and rising credit risk as reflected by wider spreads demanded by corporate borrowers.

More comprehensive data from September highlights the severity of the situation. Calastone reported that a total of £750 million was pulled from UK equity funds, the first outflow after nearly a year of inflows. Of this, £666 million was specifically from UK-focused equities, reflecting worsening economic concerns in Britain and Europe. Fixed income funds also experienced significant withdrawals, with £769 million withdrawn as investors anticipated upcoming interest rate decisions from the Bank of England and other major central banks.

Even broader figures from Refinitiv’s Lipper Alpha reveal that September saw the largest equity fund outflows in two years, totaling £9.5 billion across all equity funds. This widespread caution was driven partly by uncertainty surrounding the UK’s fiscal policies and the forthcoming Budget. Notably, passive equity funds were disproportionately affected, losing £7.38 billion, while investors appeared to seek safer ground, moving into mixed asset funds which attracted £1.72 billion in inflows over the same period.

The pattern of redemptions stretches beyond general equity markets to specialist sectors as well. Another report highlights that sector-specific funds, including those focusing on gold and green investments, faced record outflows of £512 million in September. While some geographically focused fund segments still managed modest inflows, overall investor confidence remains fragile.

This trend is not new. Over 2023, UK equity funds experienced net outflows exceeding £18 billion, as many investors shifted assets into cash and money market instruments seeking safety amid economic uncertainty. Despite sporadic positive performance from major indices like the FTSE 100, these withdrawals reflect a broader scepticism about the UK market’s prospects and perceptions of it as an unattractive investment destination. Edward Glyn has characterised this phenomenon as a ‘doom loop’ of negative sentiment feeding into further withdrawals and depressed valuations.

In summary, while the UK stock market recently touched record heights, investor behaviour tells a more cautious story. The combination of fragile economic growth, political uncertainty, and credit risk is prompting a sustained withdrawal from UK equity funds. This sustained outflow presents a challenge for the UK market, highlighting the gap between headline indices and underlying investor confidence.

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Source: Noah Wire Services