October was one of the ten worst months for equity fund flows on record as global stock markets hit their lowest point in the middle of the month, having fallen 27% since the start of the year. And they’ve only made up a quarter of those losses.

According to data from global fund network Calastone, UK investors breathed a sigh of relief in October as world markets stabilised.

While selling of UK-focused equity funds continued for 17 months in a row with October seeing £424m outflows, “it was the best month for the category since March” as it has shed £6.65bn year to date.

It said improved global market conditions helped reduce selling activity in UK-focused funds in October, “but it was the swift dispatch of Liz Truss, the ill-fated shortest-serving UK Prime Minister that was the key factor in staunching the outflow of capital”.

Calastone said: “In the tumultuous six days before her resignation, which included the firing of her Chancellor Kwasi Kwarteng, investors sold a net £238m of UK-focused equity funds.

“In the three days following her departure, which included the installation of Rishi Sunak as Prime Minister, these outflows briefly turned to modest inflows of £2.5m.”

Property funds out of favour, ESG back in

Meanwhile, outflows from equity funds of all categories also dropped to £422m in October, having hit records in August (£1.9bn) and September (£2.3bn) though this was still one of the worst months on record.

North American funds were hit hardest in the month, suffering record outflows of £648m which is the third consecutive month of “progressively larger record selling”, Calastone noted.

And three quarters of the selling activity took place in the latter half of the month when the US stock market was recovering, “suggesting investors opted to sell into strength rather than chase prices higher”.

European equity funds shed £207m and property funds had their worst month since 2021, at the height of the delta Coronavirus wave. Here investors sold a net £184m of their property fund holdings, with sentiment hit by the mini Budget and concerns over global growth.

Elsewhere, global ESG funds saw inflows return (net £776m) after they suffered the first outflows in September – the first time in three and a half years.

And investors were also encouraged back into fixed-income funds, adding a net £336m to their holdings in October.

‘Bear market or bear trap?’

Edward Glyn, head of global markets at Calastone said: “It is much too early to tell whether the current stock market rally marks the end of the bear market or is just another bear trap. Investors in equity funds clearly think it’s the latter. So, while October saw calmer conditions for equity funds, it did not mean an end to outflows.

“Stock prices are determined by the interplay of profit expectations and market interest rates. For most of this year, equity markets have been hit by rising rates. But now attention is turning to the likely impact of an economic recession on profits. Profit warnings are already on the up and economies are slowing fast, but until inflation shows signs of coming under control central banks are in no mood to return the punchbowl to the party. Investors are judging that this is bad for equities.

“The particular hit to US-equity funds may reflect the high-profile crash in some of the US’s largest and most famous tech names, like Meta and Amazon. Meanwhile, trading activity in UK-focused funds has shown that political risk remains uppermost in investors’ minds.”