UK stock markets have taken a hit as the Labor government’s pessimistic portrayal of the country’s economic outlook reverses a brief rebound in investor interest.
New figures from Calastone, a global fund network, show that UK-focused funds suffered net withdrawals of £666m in September, while other geographically focused fund sectors recorded inflows.
Overall, global investors withdrew a net £564 million from fund holdings, marking the end of a ten-month string of near-record inflows. Equity income funds, which have significant exposure to UK stocks, lost £416m of capital. According to Calaston, UK-focused equity funds have not seen positive net flows since 2021.
The decline in investor sentiment comes amid criticism of Labour’s portrayal of the UK economy since it took office in July. Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer have faced a backlash from the city for painting what some see as an overly negative picture of public finances. Reeves stated that the government had inherited the worst economic conditions since the Second World War, citing a £22 billion “black hole” in the public finances left by the previous Conservative administration.
Edward Glynn, head of global markets at Calaston, noted that the government’s “somewhat dovish comments” had dampened the emerging rebound in interest in UK stocks seen in July. “UK-focused funds appear to be off the menu for investors at the moment,” Glenn said.
This downward shift in sentiment has been reinforced by other recent data. The long-term consumer confidence index fell to its lowest level since January, while optimism among manufacturers declined at the fastest rate since the pandemic began.
Adding to the financial turmoil, Calaston also announced the “largest outflows from fixed income funds in a decade” since the start of August, driven by expectations of interest rate cuts by central banks. A combined net outflow of £1.3bn was reallocated to safer assets.
The global trend towards easing monetary policy has played a role in this transformation. Last month, the US Federal Reserve cut borrowing costs by 50 basis points and is expected to continue its easing policy, along with the European Central Bank. The Bank of England is also expected to cut its key interest rate by another 25 basis points in November, as inflation eases.
As the Budget approaches on October 30, Rachel Reeves is expected to raise taxes, but fiscal tightening will be partly offset by increased public investment spending. The government’s strategy will be closely watched by investors who remain cautious about UK stocks amid the bleak economic narrative.