July marked the sixth month of net retail outflows from Investment Association (IA) funds, as data released today by the trade body shows UK savers withdrew £129m in July, down from the £4.5bn net outflows of the previous month.
Although this might indicate a growing confidence in the market, according to Chris Cummings, chief executive of the IA, the negative trend is not likely to revert soon.
“Amidst this considerable market uncertainty, investors continue to weigh the push and pull factors of putting money aside to meet their longer-term financial goals and the impact of the escalating cost-of-living crisis on their ability to invest,” he said.
“The significant outflows we saw in June softened in July, but the overall outlook remains uncertain, as illustrated by the recent surge in UK government bond yields.”
UK 10 yr gilt yield
Source: AJ Bell, Refinitiv data
The graph above shows an inverted yield curve in the month of August, which is usually a sign of a recession, explained AJ Bell investment director Russ Mould.
“In August, the yield on the two-year gilt moved up faster than that of the 10-year, with the result that the shorter-term paper offers a higher yield,” he said.
“This is usually a sign that the bond market is pricing in a recession, as it anticipates future interest rate cuts, and thus a drop in borrowing costs.”
The report from the IA shows how investors across the IA universe have been reacting to the possibility of a recession.
Taking a look at the asset class breakdown, equity funds have suffered the most, registering outflows of £1.6bn, and will continue to face challenges, said Cummings, as the major central banks prepare for a further round of rate rises to combat inflation. Mixed asset funds fared second worst, with £117m withdrawn, followed by property funds.
At the top of the list, fixed income returned to inflows this month, with additions amounting to £893m. The money market came second, as investors took a wait-and-see approach amidst an uncertain outlook for markets.
All equity regions suffered in July. The worst affected was the UK, with £876m outflows, followed by Europe (£518m), North America (£301m) and Asia (£89m).
The most sold individual sector was the IA Europe Excluding UK, where investors withdrew a net £471m as concerns about the war in Ukraine continues.
Both IA UK All Companies and IA UK Equity Income rounded out the top three most-sold sectors, with investors removing £458m and £333m respectively.
The UK All Companies sector has not had a positive month since July 2021, while equity income funds returned to net withdrawals following a brief foray into positive flows the month before.
Investors remained concerned around the political landscape in July, with Boris Johnson announcing he was to step down, kickstarting a long leadership contest, which was resolved this week.
Conversely, the IA Short Term Money Market was the most bought (£513m of net inflows), followed by the IA Corporate Bond (£495m) and IA Volatility Managed (£267m), as investors moved towards more cautious, defensive assets.