Calastone, a data specialist, says that British investors are choosing to invest in US-listed companies over UK stocks.
Investors withdrawn a net £823million from UK funds in February, the highest amount since last February. This was the 34th consecutive negative month for UK funds. In the first quarter of this year, PS2.1billion was taken from London-focused funds, making it one of the worst quarterly results since Calastone started compiling data in 2015.
More money is being invested in North American equity funds than ever before, with £6.69 billion.
Questions about what could drive earnings growth in London-listed companies in the energy and financial services sectors have led to the selling of stocks.
Edward Glyn said that a narrative of doom and gloom regarding the London Stock Market makes it difficult to convince anyone to invest in UK-focused funds. “While the US earnings slump is over — profits have once again increased and that appears to be the primary catalyst driving fund inflows, and higher share price.”
Investors have also been put off by a slow or non-existent economic growth. The reputation of London has been tarnished by the failures of the few companies that chose to list in London over the past few years.
Glyn says that the political uncertainty which began around the Brexit referendum has caused foreign investors to stay away from UK stocks and not take advantage of their low valuations.
“We see that a large amount of foreign money is still sitting on the sidelines. He said that the UK political spectrum is not giving investors the comfort they want at this time.
UK stocks are trading at a significant discount to their international counterparts due to a slump in the amount of new capital. The FTSE 100 is trading at a price-earnings forward ratio of 11, compared to an average of 14 in the Stoxx 600, and nearly 21 for the S&P 500.
The UK equity market is now a global outlier. It was the only geographic region, along with Asia Pacific and Europe, where equity funds experienced net selling in the month of March. The expectation that central bank interest rates will be cut, which have been rising at an alarming rate over the last two years, and dampened the equity valuations has prevailed in other regions.
The reputation of London has been damaged by a series of disappointing results for companies that chose to list on the London Stock Exchange.
Inflows into global funds totaled £3.3 billion during the first quarter of the year, and £1.2 billion just in March. In the first quarter of this year, emerging market funds with higher risk saw net inflows of £700 million, which was almost three times their historical quarterly average. This money came from funds focused on India and Japan, as well as South Korea.
This offset the continued outflows of Chinese capital, where there are concerns about the ripple effects from the downturn in commercial real estate on the economy.
Glyn stated that risk was “back with a vengeance”. Money that was parked in safe haven assets is now being redirected into global equity markets. Net inflows to money market funds fell to PS401m over the first quarter. This is the lowest since the third months following the mini-budget crisis of September 2022 that sent the markets into a tailspin.
Glyn stated that investors have “bought into the growth story” of the US. Equity funds are dominated by American technology giants whose valuations were inflated because investors bet they would deliver on their promise of future earnings growth.
Investors have been looking to take advantage of the artificial intelligence hype. The “magnificent seven” — Apple, Alphabet (Alphabet), Amazon, Meta Platforms (Netflix), Nvidia, and Tesla — are responsible for almost all returns generated by the US Stock Market over the last 12 months.
Apple is among the “magnificent 7” companies that have generated the majority of returns on the US stock exchange in the last year.
The UK’s relatively low returns have not helped the mood towards it. The FTSE All-Share delivered a total return since the end October of just over 8 percent, lagging far behind the US, Japan and the Stoxx 600 which have each gained more than a fifth in the same time period.
The government announced that it will launch a British ISA to attract retail investors to the UK. Investors in “UK focused investments” would receive a £5,000 allowance in addition to their existing £20,000 tax free savings allowance. This move aims to increase the competitiveness and attractiveness of London’s capital market.
London: Is there any hope? Glyn stated that the UK stock exchange is structurally sound. “You could see a day when this great growth story of the US does not necessarily materialise, and you will be able to pivot back to UK value stocks.”
In the first months of 2018, investors pulled money from property funds at a pace not seen since 2022, when the mini budget was announced.
Investors are not as optimistic about the improved sentiment in the real estate industry, despite the fact that valuations and rental rates have stabilized after dropping sharply last year.
Calastone’s funds network shows that between January and March £210 million were withdrawn from the property fund. This is the worst quarter of outflows in recent memory, since the last three months of 2022 when Liz Truss’ mini-budget shook financial markets, causing a steep drop in valuations for offices, warehouses and commercial properties.
Since the summer 2018, only one quarter has seen investors put in more money than they took out.
Edward Glyn is the head of global markets for Calastone. He said that the decline in popularity of property fund was due to the open-ended nature of some funds, which are vulnerable to “major disrupt” when investors demand their money back. Investors are increasingly aware that open-ended funds are not suitable for illiquid assets, he explained.
The outflows are not expected to stop anytime soon. Calastone stated that a net £61.8m was taken out of property funds in the month of March. This is about the average monthly withdrawal over the last year.
Glyn stated that commercial property was in a rut as an asset. He added that the high interest rates, and concern over growth have “taken a toll” on valuations.