Investors in the United Kingdom are retreating from the stock market at an unprecedented rate, driven by mounting anxieties over soaring valuations and potential tax changes in the upcoming Budget.
Record Exodus from Equity Funds
According to the latest data from Calastone, a staggering £7.3bn was pulled from equity funds in the four months leading up to the end of October, marking the largest such outflow ever recorded. The sell-off accelerated sharply in October alone, with net outflows hitting £3.63bn. This represents the fifth consecutive month of withdrawals, completely reversing the trend of net inflows seen in the first half of the year.
The retreat was widespread, but funds focused on the UK itself bore a significant brunt. Investors withdrew £1.2bn from UK-focused funds, accounting for one third of all net selling. Global funds experienced a record £911m in outflows, while North American funds shed £649m, their third-worst performance on record.
The Dual Forces Behind the Sell-Off
Edward Glyn, Head of Global Markets at Calastone, identified two primary drivers for this dramatic shift in investor behaviour. “One is simply nerves about global equity prices, especially in the US,” he stated, pointing to the outflows from global, US, and tech-focused funds.
The second, and particularly potent, force is the growing concern surrounding Chancellor Rachel Reeves's forthcoming Budget. “For some, it’s a simple matter of crystallising capital gains in case rates go up,” Glyn explained, noting a similar surge in selling occurred last year in anticipation of tax changes.
He highlighted a deeper worry for many: the potential reform of pension rules. “The tax-free lump sum that over 55s may draw from their pensions is such a vital part of most people’s retirement planning that the risk it will be scrapped or drastically scaled back is simply too concerning for many diligent pension savers in their 50s and beyond to contemplate,” Glyn said. For these individuals, selling now appears to be the only rational choice, despite potential long-term financial consequences.
Mounting Fears of an AI Bubble Burst
These investor nerves are compounded by a sharp correction in the technology sector, which has been the engine of market growth for years. Last week, AI-related companies saw over £750bn wiped off their market value.
The sell-off was led by chipmaker Nvidia, which lost nearly ten per cent of its value in a week, equivalent to a £350bn plunge. Meta, the parent company of Facebook, WhatsApp, and Instagram, also suffered, losing close to £68bn.
This volatility has intensified fears that the years-long tech boom, fuelled by rampant speculation about artificial intelligence, has evolved into a full-blown bubble. The International Monetary Fund (IMF) issued a stark warning last month, noting that the concentration of mega-cap stocks like Microsoft and Meta now presents a greater risk than during the 2000 dot-com bubble.
“Against substantial AI-related investments the possibility of mega-cap stocks failing to generate expected returns to justify current lofty equity valuations could trigger deterioration in investor sentiment,” the IMF cautioned. Such a scenario could lead to a sudden, sharp correction, causing valuations to collapse and potentially dragging the entire market into a downturn.
