Domestic investors have fled the UK stock market at a record rate this year, missing out on a storming rally in which London’s equity market has outpaced both US and European bourses.
UK investors have pulled about £26bn from London-listed equities so far in 2025, according to EPFR data, the highest level on record for a calendar year, as measured by outflows from funds investing in the UK.
But the FTSE 100 is on course for its best year since its rebound from the global financial crisis in 2009, driven in part by foreign investors looking to diversify their exposure beyond the US and to relatively cheap valuations on the London market.
“The UK equity market is the unexpected winner of 2025, but UK investors don’t seem to care,” said Emmanuel Cau, head of European equities strategy at Barclays.
UK investors pulled £3.4bn from London-listed stocks via fund withdrawals in October alone, the biggest monthly outflow of the year.
Analysts attributed the moves in part to next week’s tax-raising Budget, which has prompted investors to sell out of the market and boost their cash reserves.
The late timing of the Budget had caused “a lot of uncertainty about what different taxes might come, and it’s given domestic investors more cause for concern”, said Simon Gergel, chief investment officer for UK equities at Allianz Global Investors.
“When you get a heightened sense of impending doom, it is understandable that people take a bit of money out,” said Charles Hall, head of research at UK investment bank Peel Hunt. “It’s a bit of risk aversion.”
According to data from funds network operator Calastone, UK investors’ bearishness on domestic stocks is also part of a broader move out of all equity markets this year in favour of lower-risk assets such as cash and fixed income.
Despite the outflows, the FTSE 100 is trading close to a record high at near 10,000 points, having climbed 16.3 per cent this year. That compares with a 12.6 per cent gain in Wall Street’s S&P 500 index and a 10.7 per cent rise in the Stoxx Europe 600 index, in local currency terms.
UK stocks have been buoyed by a huge rally in the banking sector, as well as gains for mining and defence companies, all of which are well represented in the blue-chip London market.
As investors have fretted over a potential bubble in soaring artificial intelligence stocks in recent months, the UK has offered a cheap way to diversify exposure outside the US.
The FTSE 100 trades at a price-to-earnings ratio of about 17.4 times, compared with 27.3 times for the S&P 500, according to LSEG data.
“In a world where the [UK] index is now offering something slightly different to the US, investors who want some diversification are finding a lot to like,” said Michael Stiasny, head of UK equities at M&G.
Foreign investors have added about £15bn to their UK exposure this year, as measured by fund flows.
However, this has been driven by greater interest in broad, non-US stock exposure that includes the UK — for instance through pan-European or global ex-US portfolios — rather than demand specifically for UK-focused funds.
The FTSE 100, which derives more than three-quarters of its revenues from overseas, is generally not considered by investors to be a barometer for the health of the UK economy.
Prospects for UK growth are more closely tracked by the mid-cap FTSE 250 index, which is up just 3.8 per cent this year.
“People are buying UK as a way to diversify their exposure . . . nobody is buying UK stocks because they think the UK is a great place to invest,” Cau said.
The data highlights a broader trend among domestic investors to exit the UK stock market, with defined benefit pension schemes having reduced their allocation to the London market in recent years.
Lagging performance until this year has caused UK stocks’ weighting in global benchmarks to fall to new lows. As a result, they benefit less from the huge flows of passively invested money being allocated to broad indices.
UK equities made up 6.9 per cent of the MSCI All World index a decade ago, but the figure has now fallen to 3.2 per cent.
The EPFR data underlines the challenge for the UK government in trying to boost the London stock market by encouraging domestic investors to return.
To improve retail flows to UK equities, “we need to see improved household sentiment”, said Sharon Bell, senior equities strategist at Goldman Sachs. “UK investors are not selling UK equities to buy foreign equities — they are reducing equity exposure altogether.
“We think the most important thing is to encourage a shift into higher-returning assets, such as equity . . . UK investors have a home-bias regardless, so any increase in equity allocation will flow to the UK to a high degree,” Bell added.
In a letter to Rachel Reeves earlier this month, the chair and chief executive of the London Stock Exchange Group called on the chancellor to make pension schemes’ tax incentives contingent on a 25 per cent allocation to UK assets.