No-deal fears cause UK equity fund exodus

Mounting fears of a no-deal Brexit scenario have caused UK equity funds to shed more than $2bn in the past two months, as investors opt to put their money elsewhere amid doubts over a sustained FTSE recovery.

Data from financial intelligence agency EPFR Global revealed that $2.4bn has been withdrawn from funds exposed to the UK stock market since the beginning of October, taking the net total of equity fund outflows since the Brexit referendum to $42bn – almost 17% of the assets recorded in June 2016.

Continued uncertainty about the outcome of UK-EU negotiations has also dealt a blow to the appeal of UK stocks, with portfolio managers opting to invest their funds in sturdier markets. The average level of UK exposure in global equity funds slid to an all-time low of 5.8% in 2020, compared to almost 9% at the start of 2016, according to fund performance analyst Copley Fund Research.

Chief executive at Copley, Steven Holden, attributed the decline in appeal to “the uncertainty surrounding a post-Brexit trade deal and ongoing Covid-19 concerns”.

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Ongoing talks between the European Union and the UK government have so far failed to produce a post-Brexit trade deal, with the UK set to leave the EU on the 31 December – regardless of whether a plan has been put in place or not. Both sides have warned that a no-deal scenario has become increasingly likely in recent weeks.

Ahead of meetings on Sunday, Prime Minister Boris Johnson warned of a “strong possibility” of a no-deal Brexit.

This weekend was initially proposed as the “final deadline” to reach an agreement, but the PM and European Commission President Ursula von der Leyen released a joint statement on Sunday evening confirming that talks will continue as both leaders butt heads over “major unresolved topics”.

A fatal combination of Brexit uncertainty and Covid-19 anxiety has seen the FTSE All-share index down 12% since the beginning of 2020, and although some hedge fund managers – including Marshall Wace – have begun betting on an imminent rebound, global equity managers have still noticeably cut back their exposure to the UK stock market across a number of sectors.

Just 28% of the funds recorded by Copley’s survey currently have exposure to UK energy companies, down from 46% at the start of 2019. Similarly, 51% of funds are invested in UK financial stocks, compared to 64% in 2018.

Portfolio managers are increasingly turning to tech and consumer goods stocks, such as Chinese e-commerce tycoon Alibaba and JD Sports.

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Despite the overarching anxiety surrounding Brexit negotiations, the EPFR recorded a slight surge in investments at the start of the week, with about $100m pumped into UK equity funds in the lead up to Wednesday.

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