Outflows from UK-focused equity funds fell to their lowest level in July since the sell-off began three years ago, with the Labour landslide coinciding with the best day for the sector.
Investors sold a net £207m of their UK-focused fund holdings, which is “the best result for the sector” since August 2021, according to Calastone’s Fund Flow Index.
The global funds network said this is less than one-third of the average monthly outflow year to date, with the best date for UK equity funds falling on Friday 5 July – the day after the general election and Labour’s majority win.
Overall, investors added a net £59m to their UK-focused holdings on that day, which is more than half the net buying of all equity funds.
The improvement in July was two-pronged, as there was a reduction in selling by existing holders – a tenth below the long-run monthly average – and an increase in buying, which was a tenth above average.
“It is especially positive when both indicators move in this way”, Calastone noted.
However, Edward Glyn, head of global markets at Calastone, added that “one swallow doesn’t make a summer and we did still see outflows from UK-focused funds in July”.
“But the improvement is consistent with the groundswell of positive commentary surrounding the investment case for UK equities. Growth indicators suggest the economy is outperforming its peers, while the arrival of a new Government with a huge majority is in stark contrast to today’s political turmoil in many other major G7 countries and in the UK’s recent past. Last Thursday’s first cut in interest rates in four years also vindicated optimists who had begun to turn their attention back to their home market.”
Glyn added that wider market factors are also at play.
“The last few weeks have also seen a significant rotation from very expensive US large-cap stocks to cheaper small- and mid-caps. This same trend benefits markets such as the UK [that] are trading at a significant discount to international peers.
“The big question now is whether momentum can grow enough in the coming months for UK-focused funds to see buying outweigh selling for the first time in years,” he said.
Record inflows to all equity funds this year
Calastone noted enthusiastic buying of equity funds in general in the month and since the start of 2024.
In July, inflows of £2.19bn were recorded, the highest since March this year, and “were consistent with 2024’s pattern of record buying”.
Overall, between January and July, net inflows came to £13.58bn, which is the best seven-month period in Calastone’s 10-year record.
Further, four of the best 10 months for equity funds in the last decade have been in 2024, including July.
Meanwhile, £1.12bn flowed into North America after “drying up in June”, as emerging markets recorded net buying of £424m. Calastone said inflows “ramped up” in the second half of the month following a sharp correction in the S&P 500 and global emerging market stock indices respectively. Asia-Pacific was the only other geographical equity fund sector to see outflows in the month.
Turning to money market funds, these had their best month of the year (+£432m) and fixed income funds, buoyed by hopes of rate cuts finally arriving, saw inflows return (+£84m) after two months of net selling. Meanwhile, property funds had their “least bad month” since September 2023, with outflows shrinking to £19m.
Glyn added: “UK households are sitting on record volumes of cash deposits worth £1.8trn, up £74bn over the last year alone. This reflects wage growth well ahead of inflation in recent months and it helps explain why investors have so much firepower to invest into funds at present. Hopes for a soft landing for the global economy are seemingly unlocking some of that firepower for investment. Some markets, especially the US large caps, are already very expensive and have been extremely volatile in recent days, however, so investors must be alive to the risks of chasing high valuations higher.”
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