Signs of renewed confidence in UK equities

11 June 2024

Investment Association data shows that £2.8 billion flowed into retail fund in April, the highest since August 2021. Could this be the first signs of renewed investor confidence in the markets?  Laith Khalaf, head of investment analysis at AJ Bell, comments.

Retail investors put more into funds in April than they have since August 2021, which points to some confidence returning to the UK funds market, though it remains to be seen whether this is the start of a sustainable trend or a blip.

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.

Alongside positive fund sales in April we also saw record amounts saved into Cash ISAs. This all also hints that cost of living pressures are easing as consumers find a few extra pennies to tuck away for the future.

A lot of the positive inflows in April came from global equity and fixed income funds. Global equity funds offer a simple way for investors to gain access to international markets and have performed very well this year, driven higher by the likes of Nvidia, Microsoft, Alphabet and chums. Big flows into fixed income suggest investors are anticipating interest rate cuts and are locking into current high rates while also hoping to ride the capital appreciation lower yields would deliver to bonds.

Not all boats found themselves lifted by a rising tide. UK equity funds continued their slow, sad decline with a £1.3 billion outflow. Plans to introduce the British ISA would, in an excessively optimistic scenario, deliver £4 billion of inflows into UK equities. 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. A cut to stamp duty on UK shares would be one bold step which could help catalyse greater levels of investment in UK plc.

Active funds remain under the passive cosh too, and fund managers will be wondering how much longer they have to endure this freefall before they hit rock bottom. There were £3.8 billion of retail inflows into index trackers in April, which spells a £1 billion outflow from active funds.

The ongoing shift towards passive investing has been partly driven by the melt-up of the biggest stocks in the US market producing strong performance from index trackers.

Investors are now more benchmark aware, cost conscious, and many just want a simple option to plonk in their pension. Passive funds very much fit the bill.”

Professional Paraplanner