Investment in equity funds has surged to unprecedented highs this year. The question remains: where are these investors channeling their capital?
In the first half of 2024, a remarkable £11.39bn has been poured into equity funds, marking a new record in investment. This trend has been driven by hopes for cheaper money, as stated by Edward Glyn, head of global markets at Calastone.
The focus of these investments has been diverse, with sectors like industry and construction, healthcare, and IT & software seeing significant attention. For instance, Goldbeck Robens Industrial Partners acquired six companies in the construction sector, while Adiuva Capital made five acquisitions in health, and Vista Equity purchased cloud software companies.
However, the trend shifted slightly in the subsequent quarters. While Europe remained stable with moderate gains, U.S. stocks, particularly those driven by AI themes and strong performance by tech giants like Microsoft and Nvidia, outperformed. This was despite investors showing caution regarding U.S. equity due to dollar exchange rate risks and tariff disputes. European and Swiss equities, on the other hand, were seen as core investments.
The UK economy has shown signs of strength, with real wage growth and employment data both beating analyst expectations. The country's manufacturing and services purchasing managers indices have all turned positive, unlike its European neighbours. These factors, combined with a potential reduction in the risk premium for UK assets, could accelerate sterling's move and positively surprise the equity market.
The international perception of the UK is also changing, potentially leading to sterling appreciating. A change of government in the UK could further contribute to this.
Interestingly, North America has been the main driver of equity fund inflows this year, attracting £7.8bn. The popularity of technology stocks, particularly the Magnificent 7, has boosted investments in North American funds.
Despite these positive trends, there have been some outflows from UK-focused funds. In June, there was a £3.75bn outflow from these funds. Money was also taken out of property funds, with £48m of outflows in June. On the other hand, investors put £1.72bn into equity funds holdings in the same month.
The FTSE 100 reached record highs in May, further indicating the strength of the UK equity market. The Bank of England is considering a potential interest rate cut, which, if implemented, could further boost investments.
Global funds have also seen significant inflows, attracting £7.58bn in the first six months of 2024. Meanwhile, investors withdrew £471m from bond funds in June.
The European Central Bank has started cutting interest rates, raising hopes that other central banks like the Bank of England and the US Federal Reserve will follow. This could potentially lead to more record investments in equity funds.
In conclusion, the UK equity market is showing signs of strength, with record investments and positive economic indicators. Despite some outflows from UK-focused funds, the overall trend is towards increased investment in the UK and global equity markets.
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