Was the optimism just for Christmas?

UK investors were brimming with confidence at the end of 2023, according to the latest Fund Flow Index from Calastone, the largest global funds network.

December’s improvement in sentiment was evident across all asset classes: inflows to equity funds soared, fixed income funds saw increased inflows, buying of safe-haven money market funds dropped sharply and outflows from out-of-favour mixed asset and real estate funds pared back significantly.

Inflows to equity funds soared to ￡1.19bn in December, making it by far the best month for equity funds since April 2023 and the second-highest level in almost two-and-a-half years.

Investors were especially enthusiastic about US equities – net inflows more than doubled in December to a record ￡968m. This partly explains the end-of-year rally that baffled most analysts.

But the biggest turnaround came in European equities. Having withdrawn capital from the sector in every month since January 2022, investors added a net ￡476m to European equity funds in December, the second-best month on record. Global funds and emerging markets all saw inflows too. Among geographical categories, only perennially unloved UK-focused equity funds saw outflows, though the ￡418m withdrawn was well below the monthly average for 2023 (-￡667m).

December’s inflow to equity funds was not enough to prevent them from suffering annual outflows for a second consecutive year, however. Volatile market conditions and economic uncertainty drove net outflows from the asset class in eight of 2023’s twelve months.

For the whole of 2023, investors withdrew a net ￡1.24bn from equity funds. This was a significant improvement compared to 2022(-￡6.3bn) but meant that 2023 was another tough year for the fund management industry.

Some categories have fared worse than others – 2023 marked the third consecutive year, and December the 31st?consecutive month of outflows from UK-focused equity funds. Without the ￡8.01bn of outflows from UK equities in 2023, all other kinds of equity funds between them attracted ￡6.77bn of new capital between them.

ESG funds saw the first year of net selling since the boom began in late 2019. The sad truth is, there is an inevitability to this. While it is great to support such an idea, ultimately, your portfolio is for capital growth and fads and moral stances aren’t always the best investment technique.

ESG funds saw an eighth consecutive month of outflows in December, though at just -￡54m, the net selling was the least severe since investors first turned negative on the ESG industry in May. Income and specialist sector funds also shed capital in December.

With ￡2.39bn of outflows during the year, ESG equity funds reversed just over one tenth of the inflows they have enjoyed during the ESG boom that began in late 2019.

For obvious reasons, money market funds were the big winners in 2023, absorbing a record ￡4.38bn of capital, more than in the previous eight years combined. High interest rates and low risk attracted investors to money market funds in 2023.

In December, when sentiment towards riskier assets rose sharply, inflows to money market funds fell to ￡294m, well below the average inflow of the previous six months.

Given the rise in European equities last year, it’s hard to believe that investors had withdrawn capital from the sector in every month since January 2022, until they added a net ￡476m to European equity funds in December, the second-best month on record.

UK equities still suffered withdrawals over the year even if December was positive.

Money out of equities and into bonds and the money market was a play that made perfect sense last year, but in December capital seemed to go into everything. It would seem that in December, it was raining money.

This year has started fairly poorly for equities in Europe. Both the CAC and the FTSE are down over 1% already and the DAX isn’t far behind.

The S&P500 is up 0.86%, but this is mostly down to a continuation of the magnificent seven dragging the index up.

Nvidia is leading the charge with 13.58%, Meta is up 8.14%, Microsoft 4.75% and Amazon and Alphabet both a little over 3.1%.

Even Apple which had a very poor start is now fairly flat after an uptick last week. Only Tesla of the magnificent 7 is down on the year.

AI seems to be the buzzword at the moment, and it has momentum... for now.