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Covid variant spooks investors out of UK equities

Covid variant spooks investors out of UK equities

Investors fled UK equity funds in the second half of May as news of the delta variant’s spread spooked the markets.

UK equity funds saw inflows of around £100m in the first two weeks of May, but this switched suddenly to outflows of £15m and £41m in the last two weeks of the month, according to data from Calastone.

A spokesperson for Calastone said: “Investors [were] bullish on UK stocks for the first two weeks [of May], and then if you look at the weekly data, from that second week, [there was] a dramatic shift in direction with a huge slowdown of inflows directly correlating at the same time as the massive spike in Indian variant cases were reported around May 10 and 11.”

The delta variant of Covid was discovered in the UK in mid-April, and the number of confirmed cases jumped by 160 per cent in the third week of May.

On May 14 there was an emergency meeting of the SAGE group to discuss how to tackle the variant.

European equities saw low inflows in the month, with just £31m net invested during May despite £1.7bn in combined buy and sell orders. 

Fixed income funds saw their slowest inflows since October last year, with £662m invested.

Ryan Hughes, head of active portfolios at AJ Bell, said the market was “skittish” at the moment.

He said: “I think everybody's looking at any bit of data that can give them some clarity on what the next few months and longer look like.

“People weren't really sure how quickly [the new variant] was going to spread and the impact it would have on a potential delay to the unlocking roadmap. [It’s understandable why] that might have just hit confidence in the UK recovery in the short run.”

Edward Glyn, head of global markets at Calastone added that investors can be “fickle”. 

“Traditionally, whenever there's been big news, whether that's around the UK referendum, or, US elections, events in the media do tend to have a significant effect on investor sentiment,” he said.

“[However] a lot of hope has been baked into UK-focused equity funds since the end of January as the rapid vaccine rollout raised hopes of release from Covid restrictions. 

“Certainly the economic data from purchasing manager tracking, economic growth and retail footfall is extremely encouraging, even if the infection numbers are going in the wrong direction." 

He added that a reversal of the outflows seen from equity funds in late May depended on whether the unlocking of the economy goes ahead of June 21.

“Index-linked bonds protect investors from inflation, so the disproportionate interest in funds that specialise in this asset class is a sign that some investors are wary of rising prices. They will need to be careful. 

“If interest rates need to rise more sharply than is expected, index-linked bonds will fall in value, offsetting their inflation protection.”