Investors flee from UK equities.

So far in 2021 investors have pulled USD 9.4 billion from UK equities and focused funds. Why, because investors had hoped that the roll-out of Covid-19 vaccinations would ignite a serious economic recovery, instead these hopes were dampened by problems regarding inflation and slow economic growth. 

According to EPFR, (Emerging Portfolio Fund Research) data, there has now been a net outflow of funds from UK stocks every year since 2015. As far as 2021 is concerned, investors in funds benchmarked against the FTSE 100, have dumped UK stocks due to rising inflation, the recent shortage of fuel at the pumps and post-pandemic supply chain problems.

Who and what is EPFR?

EPFR is a data research company based in Massachusetts, USA, and they track globally over 100,000 alternative and traditional funds domiciled throughout the world with more than USD 36 trillion under management.

In the case of the United Kingdom, for the EDFR to update their index for UK-oriented funds, half the funds that are tracked are benchmarked against the FTSE All Share Index. This index is used by funds managers as a benchmark when putting together their portfolios. 

FTSE 100 index and FTSE all share index

The Financial Times Stock Exchange, (FTSE, pronounced footsie) group, also known as the FTSE Russel group, is owned by the London Stock Exchange. The company are specialist in asset exchange management thereby creating index prices and offerings for the global financial markets.

The FTSE 100 is an index representing the shares on the London Stock Exchange, (LSE), of the 100 largest companies by market capitalisation. The FTSE All Share Index is a composite of the FTSE 100 and 250 Index’s which together represent the FTSE 350 Index and the FTSE Small Cap Index.

Economic recovery

It appears that the United Kingdom will recover from the pandemic at a slower pace than other countries within the G7. Forecasts suggest that economic output in the United Kingdom will be 3% below pre-pandemic levels further adding to the downward pressure on UK Equities.

Other indicators show that the supply-chain crisis will carry on well into 2003, and the annual rate of consumer price inflation will remain above the Bank of England’s target of 2%.

Sources from within the Bank of England suggest that inflation may even rise to 5% in the Q1 of 2022. Experts suggest that this will be due to the cost of fuel enduring a significant rise and increasing food prices.

What is happening elsewhere?

Whilst investors continue their flight from UK equities and oriented funds, hedge funds are making a splash in the energy sector. Pro-environment institutional investors have been selling shares in oil and gas companies and hedge funds have been snapping up these shares with alacrity. Thanks to the increases in energy prices these hedge funds are now pocketing big gains.

Why are these institutional investors dumping UK equities and stock that is clearly appreciating in value? Many large institutions want to be seen as abiding by ESG, (environmental, social and governance standards). They are therefore dumping their fossil fuel holdings despite the fact that demand for fuel is high and shares are increasing in value.

Many institutional investors feel the pressures to conform to ESG, and replace fossil fuel investments with those of renewables. Hedge funds, however, feel much less pressure and are therefore one of the few large buyers in the marketplace.  One hedge fund advised that one of their funds is up by over 100% this year.

Environmental, Social and Governance Standards (ESG)

ESG measures the ethical and sustainability of investments in companies. Those investors that are socially responsible use the ESG method before committing to any particular investment. ESG has three main criteria for ethical investors,

Environmental

Focuses on greenhouse gas emissions, climate change, resource depletion, waste and pollution and climate change.

Social

Focuses on health and safety, working conditions, (including slavery and child labour), conflict, employee relations and diversity, and local communities, (funding projects that help the poor and their communities).

Governance

Bribery and corruption, executive remuneration, tax strategy, board diversity and structure, political lobbying and donations.

Currently, there is no standardised ESG reporting, but the number of ESG reporting agencies continues to grow. As proof of how important ESG is becoming, by the end of 2020, over 90% of companies quoted on the S&P 500 have published ESG reports.

Conclusion

Price rises are already beginning to affect consumers and only last Sunday petrol prices reached an all-time high of 142.49 per litre. The previous high was recorded in April 2012 where the record was 142.48 pence per litre. Diesel peaked at 146.50 pence per litre on the same Sunday not quite matching the all-time high of 147.93 pence per litre recorded back in April 2020.

There is already a global supply-chain issue that is affecting the United Kingdom and add to that the post-Brexit issues, the supply chain problems are only being compounded. It is being suggested that the Bank of England will raise interest rates to fight inflation, add this to the supply chain issues, the increase in Covid-19 cases, and the removal of job support schemes. Investors are therefore rightly worried about the lack of growth in the United Kingdom and the downward trend affecting UK equities may continue.