UK Investors Embrace Equities Amid Global Market Optimism

In a noteworthy shift, UK investors have rekindled their interest in equities after a six-month hiatus, reflecting a positive turn in market sentiment on inflation and interest rates. Data from funds network Calastone reveals a net addition of £449 million to equity funds in November, marking a significant reversal from the preceding months of net outflows. The move is attributed to encouraging news on inflation in the US, the UK, and Europe, fueling optimism among investors and prompting a rebound in equity prices.

Market Trends Favoring Growth and Global Allocation

Calastone’s report highlights that the positive macroeconomic outlook, driven by robust US growth and easing inflation in the UK, has emboldened investors to deploy cash reserves. Confidence in a soft landing for the US economy is evident as investors allocate substantial capital to North American equity funds, with £481 million flowing in—marking the strongest month since June 2022. Additionally, £802 million has been allocated to global equity funds, and £111 million to Japanese funds. The trend is anticipated to extend globally as investors seek opportunities in both equities and bonds, according to analysts at Goldman Sachs.

Investor Confidence and Sector Preferences

Amid this resurgence, confidence appears to be returning to the market, with investors favoring momentum-driven investments. Emma Wall, Head of Investment Analysis and Research at Hargreaves Lansdown, notes that investors are strategically entering markets and sectors that have recently rallied, including India, tech stocks, and the US. The appeal extends to broader equity trackers with a tech or US tilt. However, despite the overall positive sentiment, investors continue to divest from UK-specialist funds and ESG funds, with £524 million in outflows for the seventh consecutive month.

Caution Lingers Amid Evolving Investment Landscape

While signs of optimism are prevalent, caution remains evident in UK investment flows. Morningstar data reveals that UK-domiciled money market funds held over £1 trillion in September, with DIY investors adding more than £500 million to these funds in November, totaling over £4 billion year-to-date. Analysts are closely watching for the moment when investors shift their short-term money market funds into riskier assets, a move that is yet to materialize but could reshape the investment landscape in the coming year.