Labour’s gloom sees investors pull £666m from UK funds

The government’s “rather pessimistic” characterisation of the UK economy since Labour won the general election has reversed a nascent revival in UK equity markets, new figures suggest.
UK-focused funds saw net withdrawals of £666 million in September while all other geographically focused fund sectors saw inflows, according to Calastone, a global fund network.
The result was investors pulling a net £564 million from fund holdings worldwide, ending a ten-month run of near-record inflows.
Equity income funds, a sector with large UK-equity weightings, shed £416 million. According to Calastone data, UK-focused equity funds have not registered a positive net inflow of capital since 2021.
Rachel Reeves, the chancellor, and Sir Keir Starmer have been criticised by some in the City for painting a gloomy picture of the UK economy and the public finances since Labour entered office in July.
Reeves said the incoming government inherited the worst economic situation since the Second World War from the Conservatives with a £22 billion “black hole” in public finances.
Edward Glyn, head of global markets at Calastone, said: “The new government’s rather pessimistic commentary about the UK economy appears to have put a stop to the nascent revival in interest in domestic equities that we first detected in trading data in July. UK-focused funds seem to be off the menu for investors for the time being.”
Signs that investors have become more bearish on UK stocks reinforce data issued earlier this week. A long-running consumer confidence index tumbled last month to its lowest level since January, while optimism among manufacturers slid at the quickest pace since the start of the pandemic.
Meanwhile, since the start of August, Calastone said that it had recorded the “biggest outflows from fixed income funds on its ten-year record, except for during the flash crash at the outset of the pandemic in April 2020”, driven by mounting expectations for interest rate cuts by central banks.
The combined £1.3 billion net outflow from these funds had predominantly been allocated to safe haven assets, Calastone added.
Last month the US Federal Reserve lowered borrowing costs by 50 basis points and it is expected to continue loosening policy, as is the European Central Bank. The Bank of England is expected to cut the UK base rate once more this year in November by 25 basis points.
Reeves is expected to raise taxes in her first budget on October 30 but to offset this fiscal tightening with an injection of additional investment spending.