UK-focused equity funds faced substantial withdrawals in September due to Labour’s negative economic outlook, reversing a recent recovery in the market.
- In September, UK-focused equity funds saw net withdrawals totalling £666 million, indicating a marked shift in investor confidence.
- Despite other fund sectors seeing inflows, UK equity funds have not experienced positive net inflows since 2021.
- Criticism of Labour’s depiction of the UK economy, particularly by Chancellor Rachel Reeves, has contributed to investor wariness.
- Recent declines in consumer confidence and manufacturing optimism have compounded the negative market sentiment.
In September, UK-focused equity funds experienced net withdrawals amounting to £666 million, as detailed by Calastone, a global fund network. This significant outflow highlights changing investor sentiment, particularly in light of Labour’s economic stance since taking office in July. Calastone’s figures show that while other geographically focused fund sectors enjoyed inflows, the UK-centric funds faced an adverse trend.
Remarkably, equity income funds, heavily exposed to UK equities, suffered capital losses of £416 million. The broader trend of net withdrawals aligns with a global investor pullback totalling £564 million from fund holdings, ending a ten-month period of near-record inflows. This downturn has occurred amidst criticisms directed at Labour, notably from financial sectors, over the government’s portrayal of UK economic conditions.
Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer have faced scrutiny for their perceived pessimistic depiction of public finances, with claims that they inherited a fiscal ‘black hole’ from the previous Conservative administration. According to Reeves, this £22 billion deficit represents the worst economic conditions since World War II. Edward Glyn from Calastone observed a dampened revitalisation of interest in UK equities, stating, “UK-focused funds seem to be off the menu for investors for the time being.”
Recent data reveals a sharp decline in consumer confidence, reaching its lowest since January, alongside a rapid drop in manufacturer optimism, reminiscent of the pandemic’s early days. These developments further accentuate the negative perception of the market.
Calastone also reported the largest outflows from fixed income funds on their ten-year record since August, driven by anticipations of interest rate cuts by central banks. This has led to a £1.3 billion shift towards more secure assets, in response to a global shift towards looser monetary policy. The US Federal Reserve reduced borrowing costs by 50 basis points, and both the European Central Bank and the Bank of England are expected to follow suit, with the latter poised to decrease its base rate by another 25 basis points in November.
As the 30th October budget looms, there are expectations of tax hikes from Chancellor Reeves, although these may be balanced by increased public investment. Investors will be watching the government’s strategic decisions closely, given the prevailing economic narrative casting shadows over UK equities.
The current economic discourse and policy decisions have crucially influenced investor confidence in UK equities.
