British stock markets have taken a hit as the Labor government’s pessimistic view of the country’s economic prospects offsets a short-lived recovery in investor interest.
New figures from Calastone, a global fund network, show that UK-focused funds saw a net withdrawal of £666 million in September, while other geographically focused fund sectors recorded inflows.
In total, global investors pulled a net £564 million from their fund investments, ending a run of near-record inflows in ten months. Equity funds, which have significant exposure to UK shares, lost £416m of capital. According to Calastone, UK-focused equity funds have not seen positive net inflows since 2021.
The fall in investor sentiment comes amid criticism of Labour’s view of the British economy since taking office in July. Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer have faced backlash from the city for painting what some say is an overly negative picture of the public finances. Reeves has declared that the government has inherited the worst economic conditions since the Second World War, citing a £22 billion “black hole” in public finances left by the previous Conservative government.
Edward Glyn, head of global markets at Calastone, noted that the government’s “quite pessimistic commentary” dampened the emerging revival of interest in UK shares in July. “UK funds appear to be off the menu for investors for the time being,” said Glyn.
This bearish shift in sentiment is reinforced by other recent data. A longstanding index of consumer confidence fell to its lowest level since January, while optimism among manufacturers has declined at the fastest pace since the pandemic began.
Adding to the financial turbulence, Calastone also reported the “largest outflows from fixed income funds in its ten-year record” since early August, driven by expectations of interest rate cuts by central banks. The combined net outflow of £1.3 billion has been largely reallocated to safer assets.
The global trend towards accommodative monetary policy has played a role in this shift. Last month, the US Federal Reserve cut borrowing costs by 50 basis points and is expected to continue its easing policy together with the European Central Bank. The Bank of England is also expected to cut its key interest rate by a further 25 basis points in November as inflation eases.
As the budget approaches on October 30, Rachel Reeves is expected to raise taxes, but the budget tightening will be partially offset by higher public investment. The government’s strategy will be closely watched by investors who remain cautious on UK shares despite the gloomy economic story.