A year of stronger performance hasn’t helped UK equities’ reputation among investors, according to recent IA data.
- UK investors ploughed £1.6bn into bond funds in January
- Equities saw an overall outflow, with UK equities leading the way
- The North America and Asian regions continued to attract investment
In spite of the nascent rally in markets since the start of the year, Investment Association figures show limited risk appetite among investors – and outright aversion in the case of UK equities. UK investors continue to favour low risk bonds and overseas equities, and there are few takers for the domestic market at all.
Overall, investors put £1.4bn to work in funds. In particular, they sought to capitalise on the high and stable income now available from lower risk bonds, ploughing £1.6bn into bonds funds. In contrast, equities saw an overall outflow, but the data was skewed by a dire performance from UK All Companies funds – which dropped £1.4bn. The North America and Asia regions both saw inflows at £363 million and £133 million respectively.
The preference for bonds is perhaps easier to understand than the antipathy to UK equities. UK gilts, corporate and government bonds dominated the best-sellers. Yields of 4-5% have real appeal at a time when companies earnings are unpredictable and stock markets volatile. Investors have chosen to overlook any potential wobbles on inflation – and the ructions that may create in the bond market.
The weaker performance for UK equities is certainly part of a long-term pattern. UK investors have been growing progressively more disillusioned with their home market for some time. This has served them well, as a structurally weaker sterling has flattered returns from international markets.
However, it threatens to become self-reinforcing, with building materials giant CRH and UK chip designer Arm both deciding to shun a London in favour of New York this week. They cited the lack of domestic buyers for equities. Certainly, top technology companies have favoured a US listing because they can command higher share prices there.
It may also reflect the polarisation of the UK market. On the one hand, there are the oil & gas, mining and financial companies that did well last year from rising interest rates and higher commodity prices; on the other, there are the smaller companies that tend to do well in an environment of rising confidence and economic growth. The environment at the moment favours neither side of the UK market. One trade is over, and the other is yet to begin.
There is always a lag between stronger performance and fund flows. It may be that UK investors belatedly wake up to the charms of the UK market after looking at 2022’s performance. There is a danger that they are too late and are disappointed by the UK all over again. Either way, the UK stock market appears to have a long road ahead in building confidence with investors.
