More money is being pulled out of UK stocks by investors, but is a change imminent?

The stock market has performed well, but UK equity funds saw outflows of £107 billion in January, the worst in eight months

Will investors start to feel happier?

During the first month of the year, UK equity funds kept losing money. According to data released by the Investment Association on March 6, investors withdrew £1.07 billion from domestic equity funds during the month, making the UK the most unpopular region.

January's numbers represent the worst outflows from UK stocks since May 2024, when they reached 1.9 billion. Due to the ongoing outflows of UK funds since Brexit, the industry has become accustomed to this trend.

During January, investors became pessimistic in practically every region, with outflows totaling £3 billion, even though the UK was the hardest-hit region. The trend from December, when investors poured £2.3% billion into funds, was reversible.

North America saw the only inflows in January, as assets increased by 358 million.

In spite of this, UK stocks have performed better this year than their US and international counterparts. At the moment of writing, the S&P 500 is down about 1%, while the FTSE 100 is up about 5%. The FTSE All-World, which tracks both developed and emerging markets worldwide, is up about 2% in the meantime.

This goes against a pattern that has been evident in recent years, wherein the US and international markets have outperformed the UK. They had a concentrated set of Big Tech stocks that contributed significantly to their impressive performance. The Magnificent Seven, excluding Meta, have had a difficult start to 2025.

Uncertainty has also been brought about by US President Donald Trump's trade policy, initially through the threat of tariffs and more recently through their unpredictable implementation. The S&P 500's performance has also been hindered by this.

The 3 billion withdrawal in January "emphasises that investors are exercising caution in a complex and fast-moving geopolitical and macroeconomic environment," according to Miranda Seath, director of market insight at the Investment Association.

A month is allowed for the publication of the Investment Association's fund flow data. Therefore, it remains to be seen if investors switch from US funds to those in countries like the UK that are less affected by Trump's trade war. Given the substantial valuation reductions available following years of stagnation, the domestic market may present an alluring opportunity.

Is it wise to invest in UK stocks?

Over the last ten years, the UK stock market has performed poorly due to Brexit, slow economic growth, and underinvestment. The upside is that these challenges have led to valuation reductions for investors hoping to score a deal in the home market.

At 12 times earnings, the FTSE 100 is currently much less expensive than its US and international counterparts. The FTSE All-World is trading at 18 times earnings, whereas the S&P 500 is trading at 21 times earnings. All of these numbers are derived from Factset's 12-month forward price-to-earnings ratios.

According to recent research from Aberdeen, an investment firm, UK small caps appear even more affordable than their large-cap counterparts. Small caps are about 24% less expensive than the 10-year average, according to Aberdeen's analysis, while UK large caps are about 8% less expensive. For patient investors, valuations such as these could provide an alluring entry point.

Naturally, a catalyst would be required for valuations to catch up, and investors may legitimately wonder why this time should be any different following years of gloomy sentiment and slow growth. Yet, as noted by Merryn Somerset Webb in her most recent BFIA column, there seems to be a growing amount of prudence toward the US market, which has dominated in recent years in terms of performance (and portfolio allocations).

If investors seek to diversify into other markets, the UK and Europe may gain. There are investors who seem to have already recognized the opportunity. According to Somerset Webb, US investors now control 30% of the UK market, up from 19% in 2008.

Naturally, there are risks, such as the April increase in employers' National Insurance contributions. This is anticipated to hinder company expansion at a time when inflation is once again on the rise and interest rates are still high. The Bank of England also cut its growth projection for 2025 in half, from 1 percent to 0.75%, at its most recent meeting in February.

However, there are also some causes for hope. The Bank of England doesn't seem overly concerned about the inflation outlook, and interest rates are predicted to decline more quickly in the UK than in the US. In contrast to domestic price pressures, the Bank has stated that global energy prices will be the primary driver of price increases, which are predicted to reach 3 to 7% in the third quarter.

Jason Hollands, managing director at platform Bestinvest, says the UK "doesn't deserve to be completely ignored either," despite not being his top market pick at the moment. He points to banking stocks as one "bright spot" in particular. In reaction to the heightened attention on UK and European security, Rolls-Royce's defence stock has also soared.

The Temple Bar Investment Trust has "profited well from a contrarian decision to take big positions in UK banks over the last couple of years," according to Hollands, who advises investors wishing to increase their exposure to UK stocks. Additionally, he mentions the Artemis UK Select Fund, which "focuses on growth companies that are undervalued and have the potential to have their valuations re-rated over time."