UK investors shun stockmarket rally in favour of interest-bearing assets______

Edward Glyn, Head of Global Markets

UK investors cannot be persuaded to invest despite the global stockmarket rally, according to the latest Fund Flow Index from Calastone, the world’s largest funds network. Instead, they are taking higher share prices as an opportunity to withdraw capital from equity funds, selling a net £983m of their holdings in July. This was the highest outflow since September 2022 when the government’s mini-budget upset the financial-market apple cart. Furthermore, over the last three months, outflows have totalled £1.95bn, despite global stock markets rising strongly[1].

Strong net outflows for UK equity and US equity funds

The large UK equity sector saw outflows of £710m, the 26th consecutive month of net selling. At £588m, outflows from North American equity funds were the second highest on Calastone’s record, while net selling of European, Asia-Pacific and country funds accelerated.

Global equity funds, emerging markets and specialist technology funds saw inflows

Emerging markets continued to buck the trend, however, with £305m of inflows, while global equity funds enjoyed £837m of newly subscribed cash. Meanwhile the AI boom saw inflows to the small technology fund sector accelerate to £61m, their fourth consecutive month of inflows, following a 15-month period in which almost every month suffered outflows.

Among other asset classes, property and mixed asset funds also suffered outflows in July, totalling a net £66m and £82m respectively.

ESG funds were hit by largest outflows on record in July

ESG funds suffered their third consecutive month of outflows, the longest run of selling on record. July saw them shed a record £376m, taking the cumulative outflow to £1.02bn since May.

Fixed income funds absorbing cash as investors lock into high yields

Outflows from equities, property and mixed assets are finding their way into interest-bearing funds instead. Fixed-income funds saw £347m of inflows in July, though a volatile month for bond yields meant less net buying than June’s £880m. Investors were briefly fixed income sellers during the middle of the month when bond yields fell (and therefore prices rose), but were strong buyers later in July as they chose to lock to yields that were once again climbing towards their highs for the year.

Money market funds offer even higher short-term yields – seeing strong inflows

Rising interest rates meant money market funds remained in favour too, enjoying £403m of inflows in July, with steady buying throughout the month. May, June and July 2023 are each among the five best months for money market fund inflows on Calastone’s record. Inflows to money market funds over the last six months exceeded those from the previous four years combined.

Edward Glyn, head of global markets at Calastone said: “Inflation is still higher than bond yields in many parts of the world, especially the UK, so returns are still negative in real terms. But if and when inflation returns to target, locking in at today’s high bond yields for the medium to long term will offer significant benefits to those investors who have committed capital to fixed income funds. Meanwhile, money market funds offer even higher short-term returns while policy rates are still climbing and their low risk means capital values remain very stable should investors wish to switch back to higher-risk assets in future.

“For now, investors remain very risk averse, choosing the strong rally in global share prices as an opportunity to withdraw cash rather than bank on further gains. The return on a bond can be predicted with near certainty if it is held to maturity, depending on its credit rating, while equity markets are fraught with risk. With the outlook for global economic growth uncertain and corporate earnings estimates being revised down, attractive fixed income yields have tipped the balance for fund investors away from equities for the time being.”

[1] MSCI World Index +7.8% between 1st of May 2023 and 31st July 2023

Edward Glyn, Head of Global Markets

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