British general election jitters, an all-time FTSE 100 high and QE being pumped into the eurozone lures fund managers out of UK equities

A record £1bn was pulled out of funds investing in UK shares in March as investors took a cautious approach to investing ahead of the general election on 7 May and switched their focus to continental Europe.

The move by the European Central Bank to pump €60bn a month into the financial markets to stimulate economic growth has, however, encouraged UK investors to buy shares in major companies on stock markets across the eurozone.

The £963m withdrawn from UK equity funds in March was the largest-ever outflow recorded by the Investment Association, which produces monthly statistics on flows in and out of the fund management industry.

Analysing the data, Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Private investors are staging a buyer’s strike in the lead up to the election. This is pretty par for the course when it comes to the uncertainty generated by such a big political event, and the FTSE reaching a record high won’t have helped matters.”

The FTSE 100 of leading shares powered to an all-time high of 7,122 on Monday when it appeared that the uncertainty about Greece’s long-term future was easing and despite jitters about the British general election.

“Given the UK market has actually held up well this year, with the FTSE 100 scaling a record high, and the economy is in relatively good shape compared to many of its European peers, we suspect that the aversion to UK shares is to some degree a function of the considerable uncertainties around the UK general election which continue to point to a hung parliament,” said Jason Hollands of Tilney Bestinvest said.

Khalaf said investors should try to “tune out the election clamour” and focus on the fact many FTSE 100 companies generate their revenue from outside the UK.

“When you look back at events that shaped stock market returns in the last 15 years, you think of the dotcom crash, the financial crisis, and ultra-loose monetary policy. The elections of 2005 and 2010 come pretty far down the list,” Khalaf said.

Hollands agreed: “Let’s not forget that more than two thirds of the listed UK company revenues are derived overseas, so the UK stock market is a very tenuous proxy for the UK domestic economy”.

“The key factor for a capital markets perspective is monetary policy and in this respect, the setting of rates sits with the Bank of England not the politicians. Growth jitters and ultra low inflation mean the prospect of near term rate rises is very slim, so for now the monetary policy environment remains very accommodative, which should support equities,” Hollands said.

The Investment Association pointed to the trend among investors to move money into the eurozone after data showed record inflows of £663m by retail investors into European equity funds during the month.

“It was a particularly notable month as we saw retail investors switching record amounts out of UK equity funds and into European equity funds, developing a trend seen over the previous couple of months,” said Daniel Godfrey, its chief executive.

Funds that track the stock market experienced record sales to retail investors of £938m even though sales of funds were down overall at £1.1bn, compared with £2.5bn a year earlier.