Investors fled to bonds to the tune of £1.8bn during July in a sign strong stock market rallies have caused equities to seem “detached from reality”.
Figures from the Investment Association, published last week (September 3), showed fixed income was the best-selling asset class in July 2020 with £1.8bn of net inflows.
It is an ongoing trend, following on from £1.9bn and £1.2bn of net inflows into the asset class in May and June respectively.
Adrian Lowcock, head of personal investing at Willis Owen, said equity markets had become “detached from economic reality” as quantitative easing and fiscal stimulus drove some areas to new highs.
Jason Hollands, managing director at Tilney, agreed. He said: “This is a probably an indication of some rebalancing following the incredible rally in equities since late March, which in the eyes of some investors might look disconnected from the economic reality.”
Fixed income is seen as a relatively ‘safe haven’ asset, immune from the downturn equities could face if the so-called economic reality catches up with the market.
Ben Yearsley, investment consultant at Fairview Investing, also pointed out that bond funds still provided a “decent level of income” relative to cash and while equity dividends have been cancelled, bonds can provide a reliable source of income.
Equity funds were the least popular asset class in July as investors pulled £610m from the stock market, primarily driven by UK funds which saw £912m of outflows.
Mr Yearsley said: “Equities have had a strong bounce off the bottom, and aren’t looking as attractive as four or five months ago.”
The S&P is up 53 per cent since the March lows while the UK's blue chip index is up 18 per cent over the same time period.
In June, the markets saw investors start the shift away from the stock market as they looked to cash in the profits made off the back of the stock market rally amid fears of a second coronavirus wave.
Mr Lowcock said investors faced uncertainty over the economic recovery.
“July saw rising tensions between the US and China while rising infection rates across the world and in particular Europe raised concerns of a second wave and more importantly a return of national lockdowns.
“Markets had been rallying on the hope of a ‘V-shaped’ recovery but a return of controls put this outlook under pressure and an opportunity to take some profits from equities.”
The latest figures also showed tracker funds and sustainable assets were still popular, with investors piling £1.4bn into passives in July and £966m into responsible investment funds.
imogen.tew@ft.com
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