Overall, £2bn was poured into equity funds in January, one of the top ten highest months in the index’s history. UK investors in particular were at their most “bullish” since 2021, Calastone said.
“January’s equity fund inflows were primarily driven by a distinct surge in buying interest. The volume of buy orders jumped by one sixth compared to the monthly average in 2023, while the volume of sell orders was only 1% lower,” the firm noted.
“Safe haven” money market funds had inflows slowing to just £56m, about one seventh of 2023’s monthly average inflows. The firm described this “trickle” as consistent with the surge in risk appetite in January.
‘Untested’ quantitative tightening was ‘leap in the dark’ for Bank of England
Fixed income funds gathered £367m in inflows, however this was below the long-run average, as investors were more interested in equities.
Edward Glyn, head of global markets at Calastone, explained that interest rates are “determining the financial weather right now”, with markets “convinced disinflation will bring rate cuts sooner than previously expected”.
“This has driven an equity market rally, particularly among the US tech stocks whose share prices benefit most from lower bond yields. Inflows have surged as a result,” he added. “The flipside is evaporating inflows to cautious money market safe havens.”
Money market funds enjoy ‘best year on record’ with £4.4bn inflows
He noted that central banks are attempting to “dampen” expectations of early rate cuts, but they are “struggling to land the message” with the markets.
US equities were the main beneficiaries within the category, attracting record inflows of £1.4bn, while global funds saw £1.1bn of new flows.
European funds had their third-best month on record in January, with inflows of £471m, following December 2023, which was the second-best month on record.
Glyn said European equity funds are experiencing favour due to the economy already being priced, so investors are looking beyond the rate cuts.
Emerging market equity strategies slowed to £184m. Calastone noted this was in line with the average of the last two years, but less than November’s record inflows of £413m.
Equity funds gather £449m inflows after six months of net selling
Asia Pacific funds saw their ninth consecutive month of outflows at £211m. This was attributed to China’s “much discussed economic difficulties”.
However, UK equity funds were hit by the worst outflows of all sectors, losing £673m in January.
“The UK is also experiencing a sharp disinflation, but the doom and gloom over the UK stock market seems firmly lodged in investors’ minds. UK equities are exceptionally cheap by historic and international comparisons, but buyers are nowhere to be found,” Glyn added.
ESG equity funds experienced a “sudden resurgence” with positive flows for the first time since April 2023, with a record £1.6bn, after suffering outflows of £3.7bn between April and December 2023.
Best performing funds of 2023 offer triple-digit returns but poor timing spells 30% loss
Calastone added that ESG funds were a major contributor to the strength of US and European equity fund inflows overall.
“The renewed flurry of interest in ESG in January should be treated with caution,” Glyn said. “Strong markets are good for ESG inflows, particularly if the market rally is driven by US technology companies. But none of the bigger questions about the sector such as the greenwashing debate has gone away.
“The Financial Conduct Authority’s new rules on ESG fund marketing will help, but are yet to take effect. Longer term, greater clarity and better disclosure will be good for the sector, but the road is likely to be bumpy in the short term.”
Read the full article here
