Global investors have dumped British stocks at the fastest pace in 20 years as stock pickers were said to be “terrified” by Rachel Reeves’s upcoming Budget.

New figures published on Tuesday show that global money managers sold UK stocks in the first weeks of September at the steepest rate since April 2004.

According to the survey by Bank of America (BoA), investors made a mammoth “rotation” out of UK stocks during the month into other areas of financial markets.

The whipsaw move left the average fund managers’ basket of investments -20pc “underweight” to UK equities compared with -2pc in August. The exodus also means investors had allocated the lowest proportion of their portfolio to UK stocks since March 2024.

Hugh Sergeant, a fund manager at River Global Investors, said: “Investors are currently terrified of this Government, and particularly the next Budget.”

The Chancellor is expected to raise taxes on Nov 26 in an effort to balance the shaky UK public finances, a little over a year after she imposed £40bn of tax increases on Britain.

Andrew Griffith, the shadow business secretary, said: “This is incredibly serious. Investors are selling out of Britain at the same time as wealth creators are leaving.

“Under Rachel Reeves, the tide is going out and leaving the economy parched of investment and skills. Our formidable strengths remain, but they can’t outrun the headwinds from Labour’s policies.”

Ross Mayfield, of Baird Private Wealth, said: “The combination of the UK’s vulnerable fiscal position (perceived or real), combined with the lack of publicly traded AI winners, is likely keeping foreign investors from leaning into a long UK position.”

Investors sold British shares alongside utilities and energy companies, as well as stocks tied to the EU and emerging markets, the BoA Global Fund Manager Survey showed. The survey polls around 165 chief investment officers and senior asset allocators around the world.

However, they increased shareholdings in healthcare, telecoms and consumer discretionary companies like carmakers and luxury items retailers.

The sell-off comes despite the value of the FTSE 100 climbing by more than 13pc so far this year, outstripping gains for the benchmark S&P 500 in the US, which has gained over 12pc, and the CAC 40 in France, which has risen nearly 7pc.

However, it trails other markets. The Dax, in Germany, has gained nearly 19pc off the back of plans for a surge in defence spending in Europe’s largest economy.

Meanwhile, the tech-heavy Nasdaq has climbed 15pc amid growing excitement about artificial intelligence companies.

Eren Osman, of private and commercial bank Arbuthnot Latham, said: “Despite robust returns from large-cap UK equities, smaller companies have struggled given the uncertain outlook for the domestic economy.

“A low-growth outlook and the defensive nature of the FTSE 100 have led investors to seek more compelling opportunities in Europe and, more significantly, in the US, where the AI theme continues to capture the attention of capital allocators.”

BoA said its latest survey was its most “bullish” since February, indicating investors expect market valuations to rise.

It said there had been a “big jump in global growth optimism” as the risk of a recessionary trade war faded following Donald Trump’s tariff onslaught earlier this year.

The BoA survey showed the most popular “trade” was buying Magnificent Seven stocks, which comprise Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia and Tesla. Some 42pc of fund managers expect the stocks to go up.

However, in a warning sign for the market, a record 58pc of investors think global stock markets are overvalued. Some 42pc said they feared the market is in an AI-fuelled bubble.

Despite the downturn in allocations, BoA suggested UK stocks presented an opportunity for a “contrarian trade” for investors.

Job Curtis, the portfolio manager of the City of London Investment Trust, said: “Despite the lack of investor enthusiasm, UK equities have been outperforming US equities this year, especially when the weakness of the US dollar is taken into account.

“A key factor has been that some two thirds of FTSE 100 companies have bought back shares over the last year, which is enhancing for the remaining shareholders.”

Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.