Spooked investors withdrew £2.5billion from investment funds in February.
New figures from the Investment Association suggest that growing angst over inflation and rising interest rates, rather than the war in Ukraine, is driving the trend.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Investors sold down a huge chunk of bonds in February, in the biggest outflow since the start of the pandemic.
“£2.4 billion flew out of fixed income funds over the course of the month, while equities saw a fairly negligible outflow of £47million. The flight from safe haven bonds suggests investors were spooked by inflation and rising interest rates, rather than the Ukraine crisis.
“However, the Russian invasion only happened towards the end of the month, so perhaps a greater effect will be seen in the data showing investment activity in March.
“The outlook for bonds does not look good. While there has been a sell-off this year, long dated bond yields are still looking pretty low when you consider high single digit inflation and the prospect of rapid interest rate rises.”
Investors also remain sour on UK funds, despite the FTSE holding up relatively well so far this year.
They chose instead to buy the dip in the US market, with North American funds registering a £588million net inflow. While the US market still trades on a lofty valuation, the fact that investors seem keen to pile in at the first sign of blip suggests there is support there should prices falter.
US interest rate policy remains a live issue for the S&P 500 though, considering just how much of the index trades on a high valuation, which makes it more vulnerable to interest rate increases.
Mr Khalal added: “2022 hasn’t been a good year so far for ESG funds however. We’re only two months in, but the run rate on sales appears to be around half of what it was last year. Responsible funds saw £670million of net inflows in February, compared to an average monthly inflow of £1.3billion in 2021.
“However, that’s probably a good result against a backdrop of poor sentiment overall, as so far this year retail investors have reacted to heightened uncertainty by withdrawing a total of £3.7billion from investment funds.”
FTSE 100
The FTSE 100 was up 64 points on opening this morning, sitting at 7,616. It slid yesterday, weighed down by oil major Shell after it flagged a bigger writedown following its decision to exit Russia.
Companies reporting today
- CMC Markets – Full year trading statement
- Ferrexpo – Production statement
- Johnson Matthey – Trading Statement