UK equities are going through a bruising period but data from one of the country's biggest investment platforms shows British stocks enjoyed bumper inflows in the run-up to the general election.
According to Interactive Investor, net inflows into UK stocks rose by a hefty 836% month-on-month in June, although this is still below 2023 levels.
Myron Jobson, senior personal finance analyst, at the platform, says: “UK equities were the flavour of the month in June, with the UK market buoyed by a number of headwinds, including an improving economy, a revival of M&A activity and a fall in inflation.”
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The jump, however, is only based on Interactive Investor’s flows, with industry-wide data showing that a record £1.8 billion was withdrawn from UK equity funds in May, marking the continuation of a tough period for the country's stock market. Those figures come from the Investment Association, the industry body, and have not yet been updated to include June.
Jobson adds: “There might also be an element of private investors betting on a positive outcome for UK plc following the July general election, with the newly-elected government promising to implement a number of measures to stabilise the UK economy and boost investment to domestic stocks.”
Indeed, pressure is mounting on the new Labour government to simplify the ISA rules in order to reignite the UK equity market and channel more money into British stocks.
Earlier this week, broker AJ Bell wrote to Chancellor Rachel Reeves, urging the government to consider a “radical” overhaul of ISAs as well as implementing tax breaks for UK stocks to unblock the British stock market.
AJ Bell wants the government to create a single ISA product that incorporates cash ISAs, stocks and shares ISAs and junior ISAs. It also wants Reeves to consider increasing the overall ISA allowance from £20,000 to £25,000.
Michael Summersgill, chief executive of AJ Bell, says: “Given around half of ISA assets held on AJ Bell’s platform are UK-focused, simply increasing the overall ISA allowance from £20,000 to £25,000 should naturally drive more money towards UK plc.”
What is causing the UK outflows?
The Investment Association says: “Diversification of portfolios remains a driving factor in UK equity outflows. Investors and their advisors continue to reallocate outside of the UK, with strong inflows for global, Europe and North American funds.”
In stark contrast, flows into US funds have been stellar. North American and global funds attracted £7.8bn and £7.58bn respectively in the first six months of 2024, according to separate data from investment software provider Calastone.
The rise of passive investing has also been detrimental to flows into the UK. Khalaf says: “Tracker funds have seen the lion’s share of inflows across the industry. But passive investing logically favours a global approach, and with the UK representing just 4% of the MSCI World Index, not much of the huge wall of money invested in trackers is benefiting UK stocks.”
Weak performance from active managers, Khalaf adds, “stemming from the hegemony of a clutch of large technology stocks, combined with a focus on cost and simplicity, means the rise of passive investing almost certainly has further to run”.
Will UK stock sentiment recover?
Many analysts have highlighted that London Stock Exchange-listed companies are looking cheaper than US rivals.
Michael Brown, chief investment officer at Martin Currie, highlights that real wage growth and employment data in the UK have both beaten analyst expectations. Furthermore, the country's Manufacturing and Services Purchasing Managers' Indices have all turned positive unlike its European neighbours.
“The international perception of the UK is changing,” says Brown.
“A change of government, to one more moderate and international in tone, coupled with a deterioration of European political stability, notably in France, indicates that there remains room for sterling to appreciate. This would be beneficial for lowering inflation rates even further.”
He suggests that sterling could be boosted by the Bank of England taking its time on rate cuts.
“At the same time, a reduction in the risk premium for UK assets could accelerate sterling’s move and positively surprise the equity market,” he adds.
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