Investors flee equities to profit from the ‘bear market rally’

Despite rising stock markets this summer, investors took money out of the market, explains Sam Benstead.

British investors have been pulling money from the stock market at record rates, even as shares rose sharply over the summer months to at one point recover half their losses for the year.

Data from the Investment Association (IA), the trade body for the funds industry, showed that in July £1.6 billion was taken out of stock market funds by DIY investors. This came even as global shares, as measured by the MSCI World Index, rose about 6% in sterling terms.

On top of heavy outflows in July, Calastone, the fund processing network, calculates that August was even worse for stock market funds. Its figures show that nearly £2 billion was removed from the investment sector in August, a new record, by UK savers.

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The August outflow data beat even the £1.5 billion of outflows in both June and July 2016 after the Brexit vote.

Global stock markets initially rose in August as investors anticipated looser monetary policy from central banks, before finishing the month flat, in sterling terms. Equity funds have shed £4.3 billion this year, according to Calastone.

It said: “August’s net outflow was driven by a significant increase in selling activity rather than a drop-off in buy orders, indicating a decisive choice to exit holdings.”

The selling amid relatively strong stock markets suggests that investors do not believe in the stock market rally and think it is a “bear market rally”: a short period of relief for shares among a longer-term downwards trend.

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This is the view of Jeremy Grantham, veteran investor and founder of US fund shop GMO, who argues that investors should “prepare for an epic finale of the superbubble”.

Grantham says there will be another leg down for stocks as economies deteriorate as we head into the winter.

In a sign that investors are fleeing to safer assets, the IA found that bond funds saw inflows of £893 million, with corporate bond funds attracting inflows of £495 million.

The best-selling sector was money market funds, which act like cash for large investors. The sector attracted inflows of £513 million in July.

Tracker funds saw inflows of £924 million in July 2022. Tracker funds under management stood at £290 billion at the end of July. Their overall share of industry funds under management was 20%, according to the IA.

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Chris Cummings, chief executive of the IA, said: “The significant outflows we saw in June softened in July, with fixed income funds returning to inflows this month. While we saw some improvement in July, the overall outlook remains uncertain, illustrated by the recent surge in UK government bond yields. Equity funds continue to face challenges in the current market environment as the major central banks prepare for a further round of rate rises to combat inflation.”

“Amid this considerable market uncertainty, investors continue to weigh the push and pull factors of putting money aside to meet their longer-term financial goals and the impact of the escalating cost-of-living crisis on their ability to invest.”