Markets may be peaking warns Tilney’s Hollands

Markets might just have peaked, with signals of strong inflows into investment funds on the rise, according to Jason Hollands, managing director, Business Development and Communications, Tilney Investment Management Services.

Recent data release by the Investment Association for the month of June has revealed evidence of “buoyant investor activity” with £2.9bn of net inflows from retail investors into investment funds in June this year, compared to a £3bn net outflow in the same month last year, when the UK was in the midst of the Brexit referendum.

It is also worth noting that the twelve months that followed the poll and period of outflows, stock and bond markets delivered stellar returns for those that stayed put or invested further, Hollands pointed.

Indeed, with the latest data completing the first half picture for 2017, the first six months of 2017 have proven a record breaking period for inflows for the UK funds industry with retail investors pouring £18.4bn into funds over this period.

“For the industry, which has been battered by recent criticism, this is undoubtedly cheery news, especially at a time when there is a lot of noise around global uncertainties and the overall UK Household savings ratio is very weak,” said Hollands.

‘Chasing recent positive returns’

“But it is also the case that the investing  patterns of retail investors have periodically been an indicator of when markets are nearing their peaks, as retail investors have habit of chasing recent positive strong returns after the event, while panic sell during periods when markets decline and valuations might actually represent a more appealing entry point.”

For some commentators, Hollands, pictured left, added, concerns about current stock and bond valuations at a time when many indices are near record highs, surging inflows from retail investors will undoubtedly be seen as further “evidence” that we may be entering the last days of the current bull market.

However, beneath the headline fund flows in the Investment Association data, a more “nuanced picture” emerges than one of “euphoric, cavalier, over confidence” by retail investors, as the areas that have attracted the greatest inflows in June were not equities. Instead, the oft perceived “safe havens” of fixed income (£1bn), mixed assets (£905m) and money market funds (£237) have proven popular.

Equity funds drop

Equity funds in contrast scraped in with just £166m of net inflows overall but within this, UK equity funds, typically the anchor for UK retail investors, got a thumbs down with £1.1bin of net outflows.

“In my view, there are reasons for concern in this data since fixed income, traditionally seen as a defensive asset class, currently has deeply unappealing risk/ reward characteristics chiefly as a result of the distortions created by record low interest rates and repeated Quantitative Easing programmes,” said Hollands.

“Yields on UK government bonds are very low, especially after inflation is factored in and there is very little, if any, margin of safety in bond market. Rates will not stay at these levels for ever and so those piling in now could end up staring at capital losses when policy normalisation is priced in.” 

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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