Investors flock back to equities as regulators mull interest rate cuts

Investors have put their faith in equities in anticipation of interest rate cuts later this year, with inflows to the asset class surging to £2.01 bn ($2.53 bn) in January.

This influx was primarily driven by a surge in buying interest, according to the Calastone Global Fund Flows Report. Its authors also find that the volume of buy orders grew 16 percent in 2023, while the volume of sell orders fell by 1 percent annually. 

In the US, equity funds enjoyed inflows of $1.76 bn last month, while global funds took in an additional $1.41 bn of new capital.

Across Europe, equity funds experienced their third-best month on record in January with an inflow of £471 mn, while inflows at emerging markets equity funds slowed to £184 mn. The report’s authors say this is in line with average performance over the last two years.

In China, however – where recent economic turmoil has harmed investment – the report notes a ninth consecutive month of outflows, with 265 mn drawn out in January alone.

Meanwhile, ESG equity funds across Europe and the US logged their first month of growth on the back of net outflows in 2023. January’s inflows to such funds totaled £1.63 bn and were a major contributor to the strength of US and European equity fund inflows overall, the report’s authors write.

On the other hand, last year saw investors withdraw more than half a billion ($672 mn) in capital from UK ESG equity funds, according to Calastone.

The Calastone report comes as separate data from Morningstar shows that global sustainable funds brought in $63 bn last year, compared with $161 bn in 2022, while investors pulled $5 bn from US sustainable funds in the last quarter of 2023.

Despite January bringing increased inflows into ESG equity funds, Edward Glyn, head of global markets at Calastone, says the renewed flurry of activity should be viewed with caution. ‘Strong markets are good for ESG inflows, particularly if the market rally is driven by US technology companies,’ he notes.

‘But none of the bigger questions about the sector, such as the greenwashing debate, have gone away. The Financial Conduct Authority’s new rules on ESG fund marketing will help but are yet to take effect. Longer term, greater clarity and better disclosure will be good for the sector, but the road is likely to be bumpy in the short term.’