Only a modest reversal is expected in 2023 (to 2.5% growth) due to the difficult global economic environment, however, conditions are set to improve with growth of 6.4% forecast in 2024.

Asset values have felt the effects this year of a difficult global macroeconomic environment, where there is geopolitical uncertainty, inflation is high – and rising – and many central banks have moved to tighten their monetary policy. Added to these issues, within the UK market, has been the significant decline in UK gilt prices following September’s mini-Budget. Although the value of overseas assets held in UK funds has been boosted by a relatively weak pound, UK AUM looks set to fall 9.9% this year to £1.58 trillion.

On the micro level, while the near-term UK outlook for asset prices continues to be poor, the EY ITEM Club does not forecast further declines in sterling – which would act to bolster the value of overseas assets held by UK AUM – given the currency’s already depressed level.

At a household level, while the financial pressure faced by many is expected to cut scope for discretionary saving, recent market volatility is expected to deter general appetite to invest.

This mix is expected to reduce inflows into funds. With inflation set to fall back during 2023 and cost of living pressures expected to ease, central banks will likely rein back their current hawkishness, which will support asset values, and households should find themselves in a better position to save. If this bears out, the decline in AUM values should prove temporary. AUM is forecast to rise 2.5% next year, and by 6.4% in 2024, equivalent to an AUM value of £1.72tn.

UK equities subdued over 2023 but still forecast to outperform global peers

Despite a challenging marketplace, a near-record low level for the pound, which boosts the sterling value of overseas earnings for FTSE companies, and the high weight of energy companies in the index (which are benefiting from elevated energy prices), should combine to support UK corporate profits and result in UK equities outperforming many global peers. But the FTSE’s performance in absolute terms is still expected to be subdued over the next 12 months.

In terms of real estate flows into AUM, this is expected to fall. The EY ITEM Club’s downgraded forecast for UK economic growth implies weaker rental income growth and total returns for real estate. And the recent rise in government bond yields globally has narrowed the spread with real estate yields, meaning investors’ compensation for additional risks, such as lower liquidity, has fallen.

On the alternative investment side, the ongoing volatility in financial markets is expected to drive increased flows of capital, both as a diversification strategy and with investors taking advantage of government and regulatory support in areas such as infrastructure and renewable energy.

Falling household incomes and ability to save will result in lower retail inflows

The share of income saved by households has continued to decline from the record levels reached during the pandemic. The savings ratio stood at 7.8% in Q2 2022, lower than the 8.5% in the previous quarter and down from the historic high of 26.5% in Q2 2021. However, the ratio in Q2 2022 was still above the 6.3% averaged over the pre-pandemic years 2015-19.

The EY ITEM Club estimates households have yet to spend the £200+ billion of unplanned savings built up during the pandemic. But, supporting consumption in the face of high inflation and the rising price of essentials is likely to drive a further overall decline in the savings ratio over the next year and see excess savings eroded.

The EY ITEM Club expects smaller retail flows into AUM are likely if households are compelled to save less to support spending, at least in the near-term. Recent volatility and declines in asset values and low consumer confidence are also expected to affect retail investors’ confidence and to drag on inflows. This can already be seen within retail flows which have reverted to pre-pandemic levels.

Dan Hall, UK wealth and asset management leader at EY, comments: “The current economic outlook and the ongoing market volatility is creating a very challenging operating environment for UK asset managers searching for profit through investment.

“AUM looks likely to close out this year with the biggest falls since the financial crisis, which is significant, and a clear reflection of the challenges of the current climate. However, the forecast suggests improving economic conditions heading into 2024, with UK AUM values set to rise year-on-year.

“Longer term, the outlook for the sector is more positive, and as it continues to strive for ever-more growth, the key areas of focus will include ESG, private assets, ongoing technology driven transformation and the constant managing of regulatory change.”