Where to invest: most popular regions and asset classes right now

UK investors are regaining their confidence as interest rate cuts loom. The latest data from the Investment Association (IA) reveals the fund market saw £2.8bn in net inflows in April – the highest level in almost three years. 

If you’re still sitting on their sidelines deciding where to invest, knowing which funds are proving most popular with your peers could help you make up your mind. The two bestselling asset classes with retail investors in April were global equities and fixed income, which saw £1.2bn and £1.1bn in net inflows respectively.

This won’t come as a surprise to those who have been following the latest macroeconomic developments. We are now at the top of the interest rate cycle, and some central banks have already made the move to start cutting rates. 

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The European Central Bank (ECB) took the plunge and reduced its headline rate by 0.25% this week. This brings the benchmark deposit rate down from 4% to 3.75%. The ECB joins the likes of Sweden, Switzerland and Canada, who have also started to loosen their monetary policy.

In the UK, all eyes are on the Bank of England. The Monetary Policy Committee (MPC) has signalled that things are moving in the right direction and many investors, households and businesses are hoping for a first cut at some point this summer.

Interest rate cuts should be good news for equity markets; lower rates typically boost the economy and earnings, resulting in stronger company performance. 

Similarly, now could be a good time to snap up fixed income securities before yields start to come down. By buying bonds with long maturities (or bond funds with long durations), investors can lock in higher rates for longer.

Green shoots or seasonal blip?

While the inflows reported by the IA look a lot like green shoots, it is worth remembering that the ISA season could have given things a boost as investors rushed to use up their £20,000 tax-free ISA allowance.

Likewise, earlybird ISA investors like to get ahead as soon as their new allowance kicks in on 6 April. 

“April is normally a positive month for fund sales as ISA season hits its crescendo, and with the number of higher rate taxpayers set to hit 7 million in the next few years, it’s not surprising to find investors filling their boots with valuable tax shelters,” says Laith Khalaf, head of investment analysis at AJ Bell. 

Investors hit pause on US equities

North American equities saw net inflows of £278m, making them the second most popular region. However, this was a marked slowdown compared to £662m in net inflows in March. 

“The sustained rally in US equities since November 2023 faltered as robust economic data from the US led to expectations for rate cuts being pared back,” the Investment Association explains. Many now believe the Fed will start cutting rates later than other central banks. 

Investors opt for diversification

As investors flock to global equities, one conclusion seems to be that diversification is key. Meanwhile, UK investors continue to shy away from the domestic market. UK equity funds bled £1.3bn in April, continuing a long-term trend of outflows. 

The domestic market remains unloved, despite exhibiting strong performance so far in 2024. The FTSE 100 has soared to record heights this year. Despite this, UK equities remain undervalued compared to global and US peers, so could offer a bargain to valuation-focused investors.

The UK government has taken steps to try to boost investment into the domestic market, and has been consulting on the launch of a British ISA. This would give investors an additional £5,000 tax-free allowance each year. 

So far, the British ISA has been met with a limp reception. In an “excessively optimistic scenario”, Khalaf says it would deliver £4 billion of inflows into UK equities. 

He adds: “Based on the current run rate that would just about cover 3 months of retail outflows from UK funds. The government is going to need a much bigger bazooka if it wants to reverse the diminishing demand for the UK stock market.”

Khalaf suggests abolishing stamp duty on UK shares would be a bolder and more effective step. 

Tracker funds continue to gain market share

Tracker funds saw record inflows of £3.8bn in April, exceeding the previous record of £3 billion in November 2020. Passive funds have been gaining significant market share over the past two decades, as investors look for broad market exposure at a low cost.

However, one thing investors should be mindful of is concentration risk. Although index funds offer broadly diversified exposures, markets like the US are becoming dominated by a small number of stock market giants. The Magnificent Seven tech stocks (Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon and Tesla) now make up around a third of the S&P 500’s total market value. 

While a tracker fund will mimic the weightings of the broader market index, an investment professional can actively manage concentration risk. For example, they can reduce the size of your allocation to a particular company or industry. 

This will impact you negatively if the sector or stock in question performs well, but it will limit downside risk too.

Politics looms large

This year, huge swathes of voters will head to the ballot box. The UK is racing towards a 4 July general election, with the polls suggesting a change in government is likely. Meanwhile, the US campaigns rage on amid a swirl of controversy, as Donald Trump is convicted of felony crimes. 

Investors will be keeping a close eye on both races as they try to ascertain what the results could mean for markets.

“The next elected [UK] government will have limited fiscal headroom and will be required to balance competing spending priorities,” says Miranda Seath, the IA’s director of market insight and fund sectors. Despite this, “there will be an opportunity to restore stability to the UK economy as UK inflation continues to calm and we see tentative growth,” she adds.

Regardless of who wins in the US, Seath thinks we will see “increasingly protectionist policies linked to boosting American industries”. President Joe Biden’s decision to implement 100% tariffs on Chinese e-vehicles is “a further sign of a shift from the globalised, integrated supply chains of the nineties and noughties,” she adds.