UK equity funds hit by outflows on no-deal Brexit fears as investors turn towards Europe

UK equity funds have suffered their worst three months on record as the possibility of a no-deal Brexit draws closer, according to the latest figures from Calastone. 

Investors have withdrawn a net GBP1.2 billion from UK-focused equity funds between June and August, more than the outflows seen directly after the Brexit referendum.

UK markets have been in upheaval after the UK government appeared to back a no-deal Brexit, with Prime Minister Boris Johnson saying that there was “no sense” in carrying on negotiations with the EU if a free trade deal was not agreed by mid-October. 

The UK left the European Union in January, but talks on a trade deal have stalled over key issues including fishing rights and state aid, with the UK government further muddying the waters by proposing new domestic legislation to amend the customs arrangements for Northern Ireland already agreed in the Withdrawal Agreement.

Edward Glyn, head of global markets at Calastone, says: “Not content with the economic storm caused by the pandemic, the prospect of a no-deal Brexit is once again clouding the outlook for the UK too. This is prompting investors to dump their UK holdings and switch to markets showing greater Covid-19 resilience and that don’t face Britain’s bespoke Brexit risks.”

Meanwhile, Calastone’s Fund Flows Index showed other categories of equity funds enjoying inflows in the last three months, with investors adding GBP1.6 billion to their non-UK holdings between June and August. 

European equity funds emerged in August from a two-year run of consecutive monthly outflows. Investors added GBP170 million to European funds, the fund category’s first inflows since September 2019.

Glyn comments: “On the face of it, the inflow to European funds seems strange given rising infection rates, but European equities are relatively cheap compared to their record-priced US counterparts and the dollar is in decline.

“Funds focused on US equities had one of their worst months in the last year in August so investors may be switching focus as a hedge against the political, social and economic upheaval in the US, though we will need to see several more months of solid inflows to Europe before we can be sure this is a new trend. Low valuation alone is not enough to tempt investors as unloved UK equity funds can testify.”

Equity income funds, which tend to be weighted towards UK equities, also saw their worst ever three-month period. Glyn notes that a “further GBP1.4 billion of outflows therefore represent investor distaste for UK assets”, in addition to the GBP1.2 billion that was removed from UK-focused equity funds.