Foreign investors snap up £28bn of UK debt

Foreign investors rediscovered their appetite for UK debt in March, even as other financial markets were hit by pre-election jitters.

Data from the Bank of England showed overseas investors snapped up £28bn of gilts, more than reversing the sell-off in the first two months of the year.

The confidence displayed in UK debt in March comes despite the fact uncertainty about the outcome of the election has seen increased volatility in a number of markets, notably for equities and sterling.

With less than a week to go until voting day, barring a late swing in the polls neither the Conservatives nor Labour look likely to be able to command an overall majority.

Sterling has borne the brunt of market nerves, last week dropping sharply against the dollar on two consecutive days.

Market measures of sterling volatility against the euro and the dollar - key gauges of investor fear - rose in April, reaching levels not seen since 2011, and have since remained high.

But while analysts are anticipating more sharp moves in bond yields and sterling as the vote and potential coalition negotiations loom, they caution that economic fundamentals are of more importance to longer term assets.

Samuel Tombs, UK economist at consultancy Capital Markets, said the economic outlook will not "turn on a sixpence after the election".

"The UK's strong economic fundamentals should ensure it fares well under all but the most divisive governments," he said.

Kerry Craig, global market strategist at JPMorgan Asset Management, said he believed the UK economy would pick up over the second half of the year as the global economy gains momentum, adding "history shows that political uncertainty has had little bearing on longer term economic growth, and the UK economy was quick to recover from the 2010 election and the 2014 Scottish referendum".

Demand for UK gilts is also being supported by the European Central Bank's quantitative easing policy, which has seen the central bank embark on a large-scale asset buying programme.

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Additionally, other analysts point out that despite the many differences between the parties, there is a common commitment to fiscal responsibility that has reassured investors.

Michael Saunders, UK economist at Citi, said the policy differences towards debt and the deficit "are quite modest", pointing out that the Conservatives, Labour, Liberal Democrats and the SNP all advocate public spending restraint and a lower deficit.

Mr Saunders said he does not believe "different scenarios for the post-election government will create major fiscal risks for the UK".

In the equity markets, separate data from the Investment Association, the trade body for UK asset managers, showed retail investors pulled just under £1bn from UK equity funds in March, a monthly record.

At the same time, European equity funds recorded a net retail inflow of £700m, indicating that while electoral uncertainty was a factor, the recent bullish sentiment in European markets was also a big lure.

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