Investors pulled £3bn out of funds amidst geopolitical and economic instability in January.
This marked a sharp reverse from December, when £2.3bn had flowed into funds, according to data published by the Investment Association (IA).
The research said macroeconomic conditions on the home front, namely the reacceleration of inflation, had played a part in the investment outpourings.
The IA said the lack of GDP growth at the end of 2024 had damaged investor confidence, triggering the outflows.
Kate Marshall, lead investment analyst at Hargreaves Lansdown, said the “Backdrop of weaker economic growth, rising inflation, uncertainty around fiscal policy, and the potential for tax rises in the spring budget” had contributed towards a “weakened” UK sentiment.
The UK All Companies sector—those funds with over 80 per cent invested in quoted UK shares—was the worst-performing IA Sector in January, with an outflow of £1.2bn.
North American funds saw net inflows of £358m in January.
The UK Smaller Companies sector experienced £206m in outflows. Given their higher revenue exposure to the domestic economy, the IA anticipated the figure reflected “broader investor concern”.
The IA said investors were bracing for the hike in employers’ national insurance contributions to 15 per cent in April, following changes made in Chancellor Rachel Reeves’ Autumn Budget.
‘Heightened volatility this year’ will make investors wait
The broader political landscape had also had a drastic effect on UK investment, with the new Presidential administration and changing dynamics of AI forging a “mixed outlook” for the economy.
Marshall said: “In January we saw the inauguration of Trump as the new US President, which was swiftly followed by concerns around tariffs and the impact this could have on global growth, inflation, and interest rate cuts.
“Some investors are likely to have sold investments in anticipation of heightened volatility this year and prefer to wait to see the outcome of US policy that at times feels like it’s changing on a daily basis.”
“Investors should remember that different countries will perform well at different times though – this is something we’ve seen more recently, with European equities having a renaissance.
“This highlights the importance of investing across different regions within a broader portfolio,” she added.
Bonds and mixed assets each managed minor inflows at £187m and £39m, respectively.
Marshall said: “While bonds had a bumpy ride last year, the higher yields on offer and potential for further rate cuts this year has maintained enthusiasm for the asset class.”
Director at Investment Association Miranda Seath, said: “In the UK, all eyes are on the outlook for growth.
“The forecast from the Office for Budget Responsibility, due out at the end of March, will tell us more about the Government’s ability to meet its fiscal targets and give an indication of whether further tax rises may be necessary.
She added: “A more certain environment would help investors and their advisers make confident decisions on where to invest capital – it is not yet clear when this will come as they navigate what is set to be a year of change.”