Stocks in the UK are poised for a market rally – consider investing immediately.
In the past few years, the UK's share of the global total has been shrinking, drawing significant attention due to a disastrous response to the Covid-19 pandemic and its subsequent impact on the economy and public finances. Despite these challenges, the FTSE 100 continues to offer a competitive return, with a yield of 3.6%, pushing the annual return above the average inflation rate of 2.5%.
However, a series of factors have led to outflows from UK equities in 2024 and into early 2025. Heightened trade tensions, especially between the US and the rest of the world, have caused UK investors to reduce their equity fund exposure and seek diversification away from UK equities towards European funds and other regions.
Additionally, ongoing domestic investor selling, despite the UK equities outperforming global and US peers in some periods, has contributed to large outflows. UK equity funds experienced multi-billion-pound net sales in early 2025. Investors have also shown a preference for money market and multi-asset funds as a safer alternative amid uncertainty, which attracted significant inflows while UK equity funds saw outflows.
Furthermore, concerns about UK political and economic factors, including uncertainty over the Chancellor's future and weaker investor sentiment, have weighed on UK stock performance versus European peers and led to further selling pressure. Broader economic concerns such as inflation, tariff effects, and the potential for less accommodative monetary policy have made investors wary of high-yield bonds and riskier UK equity sectors, prompting reallocation away from UK equities.
As a result, net sales of UK equity funds by private investors have re-accelerated, with £1.6 billion of sales in October 2024. The FTSE 100 index has only increased 15% since 31 December 1999, representing a compound annual gain of barely 0.5% per annum.
Despite these challenges, some analysts remain optimistic about the UK market. Gervais Williams, head of equities at Premier Miton, believes the UK market will outperform and be the best-performing market over the next 20 years, especially for smaller companies.
However, the UK now accounts for just 3.3% of the MSCI All Country World index, down from 10% 25 years ago. Insurance companies and pension funds have sold out of the equity market, owning only 4% of it (down from nearly half in 1997). Low valuations in the UK market are partly due to concerns about terrible politics and regulation.
In conclusion, the outflows in UK equities in 2024 and into early 2025 were driven by geopolitical trade tensions, ongoing domestic investor selling despite past outperformance, political uncertainty, and a preference for safer or more diversified assets amid a challenging global economic backdrop. Despite these challenges, some analysts remain optimistic about the UK market's future, particularly for smaller companies.
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- The ongoing outflows from UK equities in 2024 and early 2025 have been influenced by investors' desire to diversify their portfolios away from UK equities, toward European funds and other regions.
- Investors have shown a preference for safer alternatives, such as money market and multi-asset funds, which have attracted significant inflows while UK equity funds have seen outflows.
- Concerns about UK political and economic factors, like uncertainty over the Chancellor's future and weakened investor sentiment, have impacted UK stock performance, leading to further selling pressure.
- Despite the obstacles, some analysts remain positive about the UK market, particularly for smaller companies, and anticipate that the UK market could outperform and be the best-performing market over the next 20 years. However, the UK now accounts for a smaller percentage of the MSCI All Country World index compared to 25 years ago, with insurance companies and pension funds owning a significantly reduced portion of the UK equity market.
