UK equity funds continued to bleed assets in the first month of the year. Data published by the Investment Association on 6 March shows investors pulled £1.7 billion from domestic equity funds over the course of the month, making the UK the most unpopular region.
January’s figures are the worst for UK equities since May 2024, when outflows hit £1.9 billion. The industry has grown used to this trend, with UK funds having suffered persistent outflows since Brexit.
Although the UK was the worst-hit region in January, investors turned bearish across almost all regions during the month, with outflows totalling £3 billion overall. This reversed the trend seen in December, when investors pumped £2.3 billion into funds.
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The only region with inflows in January was North America, with assets rising by £358 million.
Despite this, UK stocks have outperformed their US and global counterparts so far this year. The FTSE 100 is up by around 5%, at the time of writing, while the S&P 500 is down by around 1%. Meanwhile, the FTSE All-World, which includes both developed and emerging markets globally, is up by around 2%.
This reverses a trend we have seen play out in recent years – one where US and global markets outperformed the UK. Their strong performance was largely driven by a concentrated group of Big Tech stocks. With the exception of Meta, however, the Magnificent Seven have had a tough start in 2025.
US president Donald Trump’s trade policy has also created uncertainty, first through the threat of tariffs and now through their erratic imposition. This has also hampered the S&P 500’s performance.
Miranda Seath, director of market insight at the Investment Association, says the £3 billion outflow seen in January overall “emphasises that investors are exercising caution in a complex and fast-moving geopolitical and macroeconomic environment”.
The Investment Association’s fund flow data is published with a one-month time lag. As such, time will tell whether investors sour on US funds in favour of regions less impacted by Trump’s trade war, such as the UK. With significant valuation discounts on offer after years in the doldrums, the domestic market could offer an enticing opportunity.
Should you invest in UK equities?
Brexit, limp economic growth and underinvestment have all hindered the performance of the UK stock market over the past decade. The silver lining is that these headwinds have created valuation discounts for investors looking to bag a bargain in the domestic market.
The FTSE 100 is currently trading at 12 times earnings, making it significantly cheaper than its US and global counterparts. The S&P 500 is trading at 21 times earnings, while the FTSE All-World is trading at 18 times earnings. All of these figures are based on 12-month forward price-to-earnings ratios, provided by Factset.
Recent analysis from investment company Aberdeen suggests UK small caps look even cheaper than their large cap counterparts. While UK large caps are around 8% cheaper than the 10-year average, small caps are around 24% cheaper, based on Aberdeen’s analysis. Valuations like this could create an attractive entry point for patient investors.
There would need to be a catalyst for valuations to catch up, of course, and after years of negative sentiment and weak growth, investors might rightfully question why this time should be any different. However, as Merryn Somerset Webb points out in her recent MoneyWeek column, there appears to be a growing level of caution towards the US – a market which has dominated in terms of performance (and portfolio allocations) in recent years.
The UK and Europe could benefit if investors look to diversify into other markets. Some investors appear to have recognised the opportunity already. Somerset Webb points out that US investors now own 30% of the UK market, up from 19% in 2008.
There are risks, of course, including the increase in employers’ National Insurance contributions from April. This is expected to weigh on business growth at a time when interest rates are still high and inflation is on the rise again. The Bank of England also slashed its 2025 growth forecast in half from 1.5% to 0.75% when it last met in February.
That said, there are some reasons for optimism too. Interest rates are expected to fall faster in the UK than the US, and the Bank of England doesn’t appear unduly worried about the inflation outlook. Price rises are expected to hit 3.7% in the third quarter, but the Bank has indicated that global energy prices will be the main driver (as opposed to domestic price pressures).
Although the UK isn’t his top market pick currently, Jason Hollands, managing director at platform Bestinvest, says it “doesn’t deserve to be completely ignored either”. He highlights banking stocks as a particular “bright spot”. Defence stock Rolls Royce has also surged in response to the increased focus on European and UK security.
If investors are looking to increase their exposure to UK equities, Hollands suggests they could consider the Temple Bar Investment Trust, which has “profited well from a contrarian decision to take big positions in UK banks over the last couple of years”. He also points to the Artemis UK Select Fund, which “targets undervalued growth companies with the potential to have their valuations re-rated over time”.
