Emerging markets buck investor woes as equity funds shunned

Investors may have reduced their equity holdings in favor of bonds, as emerging markets defied a downward trend. According to Calastone's latest fund flow index, UK investors withdrew £858 million from equity funds in September, marking the fifteenth consecutive month of outflows. Since the beginning of the year, equities have seen outflows totaling £5.4 billion.

However, emerging market equities attracted £133 million, as investors sought diversification away from heavily concentrated developed markets. Edward Glyn, head of global markets at Calastone, noted that inflows into emerging markets suggested a search for different economies and valuations.

Global equity funds also experienced outflows of £410 million. UK's spring rebound came to an abrupt halt, with investors withdrawing £708 million, marking the 63rd consecutive month of outflows. This signalled the end of the UK's spring rally. In May, London reported its first net inflows since November 2024, dubbed a "surprise reversal" for the firm.

The gloom in the domestic market spilled over to North American equity funds, which saw £124 million in outflows, the largest since November 2025. Asian equity funds faced a loss of £371 million, marking the second-worst month on record. European, Japanese, and Chinese sector-focused funds also reported net selling.

Edward Glyn commented: "Investors are nervous and this is making them very picky. Equities remain firmly out of favor despite relatively resilient market performance. High share prices, surging bond yields, and significant geopolitical and inflation concerns mean investors have plenty of reasons to question how much equity risk they want to carry."

To cope with these fears, investors turned to fixed income, with bond funds reporting £655 million in inflows. High-yield funds were particularly lucrative, pulling in £421 million despite the turbulent bond market. September witnessed severe upheaval in the global bond market due to rising energy prices, inflation fears, and weak government finances.

Higher yields attracted new money, providing increased income for investors buying at current prices, making bonds more attractive.