Fund managers dumping UK stocks at fast rate

The scale of investor doubts over the UK economy is after fresh data found fund managers were pulling out of UK stocks at the fastest in more than two decades.

Average equity allocations to the UK dropped from a net 2 per cent underweight in August to a net 20 per cent underweight in September, according to Bank of America’s global fund manager survey, marking the biggest monthly rotation away from UK equities since 2004.

Allocation into UK stocks, which is now at its lowest in 18 months, is now considered a contrarian trade, Bank of America analysis suggested, in signs investors were unclear from Britain’s sluggish growth and the prospect of major tax hikes to be unveiled in the Chancellor’s budget in November.

Hugh Sergeant, a fund manager at River Global Investors, said: “Investors are currently terrified of this Government and particularly the next Budget”. The analysis adds to a growing number of warnings on UK’s economy, alongside stagnant GDP growth and a decline in payrolled employment. Businesses are bracing for huge tax rises in the autumn, as chancellor Rachel Reeves puts more pressure on employers in a bid to shore up the public finances and fund Labour’s increased spending commitments.

Shadow Business Secretary, Andrew Griffith MP, said: “This is incredibly serious. Investors are selling out of Britain at the same time as wealth creators are leaving.

“Under Rachel Reeves, the tide is going out and leaving the economy parched of investment and skills. Our formidable strengths remain but they can’t outrun the headwinds from Labour’s policies”. The Bank of America survey also found that investor sentiment on expectations for global growth rose to the highest level since February — but a net 16 per cent of fund managers continue to expect the global economy to weaken.

The survey showed as many as half of fund managers believe that adoption of AI was already leading to productivity increases, with another 15 per cent believing the productivity improvements would happen in 2026. However, investors were divided over whether AI stocks were in a bubble, with 42 per cent believing there was an AI bubble, an uptick from last month and 48 per cent believing there was no bubble.

Fund managers are expecting inflation to rise over the next year as the mood towards the global economy worsens. Over 40 per cent of fund managers believe the global economy is set to weaken over the next 12 months, with US economic policy and weaker consumer demand seen as the largest forces dragging it down, according to the latest Bank of America European fund manager survey.

Just over a month ago, only 31 per cent thought the global economy would diminish, but Trump’s sweeping and erratic tariffs policies and their disruption to the global trade order, have caused sentiment to sour.

Now, 58 per cent see the US administration’s policies as having a negative impact on growth while also causing inflation to rise, up from 52 per cent last month, showing growing worries of “stagflation”, a troublesome economic situation in which high inflation and unemployment coupled with a stagnant economy stifles growth.

Expectations for inflation to rise hit 18 per cent, its highest since May when the market was dealing with the fallout of Trump’s announcement of tariffs. A trade war triggering a global recession remains the biggest risk for causing significant losses in the market for investors, but a growing number are also concerned stubborn inflation could thwart a cut to interest rates by the Federal Reserve.

While the attitude towards global markets worsen, 35 per cent of respondents are expecting to see stronger European growth over the coming year. Similarly, 23 per cent see scope for European inflation to decline over that period, showing hope for the market amid global turmoil.