Investors pull $9.4bn from UK funds in 2021 on rising inflation angst

Investors have pulled $9.4bn out of UK-focused equity funds this year after hopes that a Covid-19 vaccination drive will fuel a vigorous economic recovery were overshadowed by questions about slow growth and high inflation.

The net withdrawals mean that funds invested in UK stocks are now heading for a sixth consecutive year of outflows, according to EPFR data.

Investors have turned away from the UK so far in 2021 because of “post-pandemic supply chain problems”, said Bank of America quantitative strategist Paulina Strzelinska, who also pointed to rising inflation and the recent energy crisis.

Half of the funds tracked by EPFR’s index for UK-oriented funds are benchmarked to the domestically focused FTSE All-Share, meaning that their managers use this index as a reference point for constructing their portfolios.

Funds that benchmark against the FTSE 100 have also endured outflows in October. The blue-chip index is stacked with energy, resources and consumer stocks that make the bulk of their revenues abroad.

“There’s just this sense of caution about the UK” when talking to clients about investing globally, said Ross Mayfield, a strategist at US investment bank RW Baird, driven by “monetary, fiscal and trade uncertainties”.

The UK will recover more slowly from the shocks of coronavirus than other G7 nations, the IMF has forecast, with economic output in 2024 still 3 per cent below its pre-pandemic levels.

British business leaders told MPs earlier this month that a supply chain crisis caused by labour shortages and price rises would spill into 2023. The annual rate of consumer price inflation in the UK dipped from 3.2 per cent in August to 3.1 per cent in September. But economists expect this figure to remain well above the Bank of England’s 2 per cent target for much of next year because of spiralling fuel costs and forecasts of significant food price increases. Huw Pill, the BoE’s chief economist, said last week that inflation was likely to rise “close to or even slightly above 5 per cent” early in 2022.

Financial markets are predicting the BoE will lift interest rates as soon as next month. And while supply chain bottlenecks and rising commodity prices are a global trend, the central bank’s hawkish stance has increased the possibility of a sharper slowdown in Britain than other developed markets, some analysts have said.

“Supply issues, already acute from Covid, are being further compounded by Brexit,” a team of Barclays analysts led by Emmanuel Cau wrote in a note to clients.

“The central bank is increasingly sounding like an inflation hawk,” the analysts said, explaining that the prospect of rate rises on top of the government’s recent withdrawal of job support schemes and a surge in coronavirus cases meant investors were “increasingly concerned about the growth outlook”.

“The UK equity space as a whole remains unloved,” they said.

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