Investors pull money from UK equities as government warns of “painful” Budget

Government doom-mongering could be having a negative effect on the UK investment market, with investors turning bearish on UK equities once again.

UK equity funds have been bleeding assets for years now after investors fled the domestic market in the aftermath of Brexit. But for a brief period over the summer, it looked like asset managers might be starting to stem the flow. 

Net outflows in the month of July were £207 million, the smallest figure in three years according to fund network Calastone. However, usual service has since resumed with net outflows hitting £666 million in September.

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Post-election optimism and a decent first half for the FTSE 100 buoyed investor sentiment earlier this year. The day after the general election, investors poured a net £59 million into UK equity funds on the news of a Labour win. 

Experts were describing the UK as a beacon of relative stability and, for a brief interlude, it seemed that way. Meanwhile, other parts of the world were navigating political violence (see Trump assassination attempts) and a spate of far-right election gains (France and Germany, for example).  

Since then, the mood has shifted. Far-right riots broke out in the UK a few weeks after Labour’s election victory, suggesting greater political volatility than commentators had previously acknowledged. 

The fiscal backdrop has taken a turn for the worse as well. In her July spending audit, chancellor Rachel Reeves accused the previous government of leaving a £22 billion shortfall in the public finances. Ever since, Labour has been criticised for setting a gloomy tone with prime minister Keir Starmer warning the 30 October Budget will be “painful” and involve “difficult decisions”. 

Already, pensioners have been hit by the decision to cut the Winter Fuel Payment. Tax hikes are now expected when Reeves delivers her fiscal statement, with capital gains tax, pension tax relief and fuel duty all possible targets, among others.

“The new government’s rather pessimistic commentary about the UK economy appears to have put a stop to the nascent revival in interest in domestic equities that we first detected in trading data in July,” says Edward Glyn, head of global markets at Calastone. 

With this in mind, he says that UK-focused funds “seem to be off the menu for investors for the time-being”. 

Investment trends in September

All other geographic areas saw equity inflows in September, albeit at a lower level than their monthly averages over the past year. Global and US equity funds were the most popular last month, taking £422m and £413m respectively, Calastone reports.

Despite this, equity funds in general saw £564 million in outflows overall – their first negative month since October 2023. September’s outflows ended a 10-month stint of “near record-breaking inflows”, Calastone says. UK equities bore the brunt of the selling. 

It was also a bad month for fixed income flows, with investors taking profits after a period of strength in bond markets. “Bond markets have rallied strongly over the last six months with yields plummeting as investors watched economies cool around the world and priced in the likelihood of falling interest rates,” says Glyn. 

He adds: “Expectations ran high that the US Federal Reserve would cut rates by half a percentage point in mid-September – which it duly delivered – so investors seemingly followed the adage ‘buy the rumour, sell the news’ and banked their gains,” he adds.

Fixed income funds shed £769 million over the course of September, Calastone reports, with a large portion of this money being reallocated to safe-haven money market funds.