Investors pull a record £7.8bn from UK funds as Brexit fears take hold

Stocks generating most of their earnings in this country are hit as backers reduce exposure to Britain

POLITICAL turmoil in Westminster tipped Uk-exposed stocks into a bear market last week as investors rushed to grab protection from Government debt default amid mounting no-deal Brexit worries.

The FTSE Local UK index – which tracks the mid- and large-cap stocks generating at least 70pc of their revenue in the UK – has now slumped more than 20pc from its 52-week high as investors cut their British exposure.

Investors have now yanked a record $9.8bn (£7.8bn) from UK equity funds in the year to date, Bank of America Merrill Lynch data revealed on Friday. While London’s market has been hit by a global stocks slump – sparked by fears of tightening financial conditions for companies and signs of economic growth peaking – the Brexit stalemate has sent stocks generating the bulk of their earnings in the UK sliding further.

The price of credit default swaps on UK Government debt – insurance taken out by investors to protect themselves from default – has surged 36pc in the past month to hit its highest level since the aftermath of the referendum.

UK assets have been rocked by fears that Britain is edging closer to leaving the EU without a deal. Royal Bank of Scotland shares and stocks in housebuilders, which are heavily dependent on the health of the British economy, have been among the hardest hit on London’s market by no-deal worries.

The threat to Theresa May’s leadership and delays to the meaningful vote in Parliament knocked the pound down to its lowest level against the dollar in 20 months last Monday.

Sterling also neared a 20-month low versus the euro, which is considered the market’s Brexit risk gauge, before rallying the following day on expectations that the Prime Minister would shore up her position in the leadership vote.

The Bank of England warned in November that a no-deal scenario could knock 8pc off the UK’S gross domestic product within a year, the worst slump since the Second World War, while business leaders have criticised MPS for the impasse in Parliament with just three months until the deadline. The Institute of Directors said businesses are “tearing their hair out” at the “constant can-kicking and internal domestic political strife”.

Uncertainty for businesses and the risk of no deal will “continue to drag on the economy” and the “lack of clarity is likely to see growth slow sharply” in the fourth quarter of the year, according to Capital Economics.

Its economist Ruth Gregory predicted that a disorderly Brexit would cause a recession in 2019 and another slump in the pound against the dollar to $1.12, a level not seen since the Eighties.