Nervous investors withdrew record amounts of money from equity funds in the build-up to the Budget, data suggests.
Chancellor Rachel Reeves had warned of “tough decisions” in her Autumn Budget and ended up revealing £40 billion of tax rises.
This included an immediate capital gains tax (CGT) hike last Wednesday from 10% to 18% for basic rate taxpayers and 20% to 24% for higher earners.
Sign up to Money Morning
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Many investors appear to have taken steps to avoid expected higher charges.
The latest Fund Flow Index from data provider Calastone showed investors sold down a net £2.71bn of their holdings last month, with every category of equity funds seeing outflows, a record for October.
Sell orders surged 36% month-on-month but dropped 40% overnight as CGT hikes took effect on Budget Day, Calastone said.
“Fears of a Capital Gains Tax grab in last week’s budget spurred investors to book their profits and crystallise a lower tax bill well before the chancellor rose to her feet in the Commons,” says Edward Glyn, head of global markets at Calastone.
“Unease in September meant the early birds took fright first, but by October investors were flocking for the exits.”
Heading for the exit
Most equity funds saw outflows last month, according to Calastone.
Global funds saw their first outflows in more than two years and October was the first month in more than a year that UK investors withdrew cash from US equity funds, with £135 million withdrawn.
UK assets were hit hardest though, with £988 million pulled from funds focused on UK equities, the fourth worst month on record for the sector.
Meanwhile, fixed income funds had their best month since June 2023, with £631 million added during October.
The Budget appears to have been the main driver of all this activity.
“There were no major catalysts in global markets to spur a rout in October – indices drifted lower in the second half of the month in response to rising bond yields, but there were no alarming moves,” adds Glyn.
“Instead, sharply higher selling by investors based here in the UK suggests the net outflow was driven by a motivation to book profits after strong market rises this year. Moreover, October’s robust buying activity indicates that investors were also happy enough to reinvest much of the proceeds of their sales back into funds.
“The startling change in behaviour between 29 October and Budget Day is a clear indication that tax was the main motivation for all this activity.”
Is it still worth investing in UK funds?
Investors like clarity and with the Budget out of the way, there is an argument that the UK stock market is worth backing.
UK stocks have suffered from a lack of exposure to the technology boom but some argue that the market is trading at decent discounts.
The Budget did introduce extra costs for businesses though, with a national insurance increase for employers and by increasing the national minimum wage.
Additionally, alternative investment market stocks (AIM) will no longer be exempt from an estate for inheritance tax (IHT) from April 2026, with an effective rate of 20%, which may stifle investment in growing companies.
Jason Hollands, managing director of Bestinvest, says there is a case for buying UK equities, especially at the large-cap end of the market, though it is important to be sector-selective.
“The increased cost to companies with large domestic workforces of higher employer’s national insurance is a headwind on earnings, though some firms may be able to pass the costs on to customers or through efficiencies such as staff cuts or lower pay rises,” he says.
“Sectors that look particularly vulnerable are retailers such as supermarkets, and the hospitality sector, though these make up a relatively modest part of the overall UK market.
“With UK equities already cheap compared to longer-term trend and global comparisons, a lot of negative sentiment is already baked into valuations. Continued outflows, particularly from retail investors, were likely driven by the significant speculation around tax hikes in the run up to the Budget and it hasn’t been helped by the chancellor and Prime Minister talking down the state of the economy in an attempt to justify the ‘painful decisions’ they made.”
Hollands adds that AIM shares may be less appealing but says some relief is better than nothing.
“AIM shares will continue to have a role as part of IHT planning, though we will probably see some shift in demand towards unquoted assets that will remain eligible for up 100% relief up to the new cap of £1 million,” he says.
“It is also important to contextualise future demand for AIM shares for investors seeking to reduce IHT exposure by bearing in mind a lot more estates are going to get pulled into the web of IHT when unused money purchase pension assets become part of an estate from 2027, so demand for assets that can provide some form of relief against IHT is likely to remain robust.”
