The UK and China were the best performing markets globally in July 2025, yet fund flow data shows no interest from UK retail investors. What is going on?
The FTSE 100 returned 4.2% in July including dividends, driven by double-digit gains from the likes of vapes-to-cigarette maker British American Tobacco (BATS), consumer goods group Reckitt (RKT), and gambling specialist Entain (ENT). Market heavyweights including drugs company AstraZeneca (AZN), engineer Rolls-Royce (RR.) and oil producer BP (BP.) also delivered in one month the kind of returns you might only expect from UK shares across an entire year.
It is fair to say the FTSE 100 was a fruitful place to make money in July, yet Investment Association data shows that retail investors withdrew £718 million from UK equity funds in the month. Normally you would expect a robust performance from a specific market to attract investors, not turn them away.
The Investment Association suggests there is an element of investors derisking their portfolio ahead of the Budget on 26 November. That makes sense up to a point.
On the one hand, the market is growing ever worried about the state of UK public finances and how the chancellor is going to fill the black hole. There is speculation about taxes going up, and whether that is still enough to solve the problem.
On the other hand, what is slightly perplexing with the outflows from UK equity funds is the fact that approximately three quarters of earnings from FTSE 100 constituents come from overseas. They are not reliant on the UK economy to do well.
Investors might simply be worried about the economic outlook globally or they might take the view that negative sentiment towards the UK will hold back the FTSE 100 because it is the benchmark for the country’s stock market.
READING THE SIGNS FROM BOND INVESTORS
Worries about the outlook for the UK economy and concerns about government policies have been getting louder and louder and exploded in early September when 30-year gilt yields hit a 27-year high.
Bond investors are making their opinions known loud and clear. By dumping long-dated gilts they are effectively saying the UK is now a riskier investment proposition and they will not start buying gilts again until the reward is much higher. When gilt prices fall, the yield rises.
It is noteworthy that money market fund demand has soared. The Investment Association recorded £1 billion inflows in July into these products which offer cash-like returns. They are popular with people who want to keep money inside an investment tax wrapper such as an ISA or SIPP (self-invested personal pension) and potentially get a better return than their investment platform provider might pay on straight cash. The alternative is to park money in a standard savings account and that brings income tax into the equation.
The jump in demand for money market funds implies investors are in a holding pattern until there is more clarity on how Rachel Reeves’ updated plans at the Budget might impact the economy.
The amount going into money market funds in July was half of the total amount of inflows in the whole of 2024, to illustrate the scale of recent demand. The previous high for net inflows for this investment type over the past 10 years was £3.3 billion in 2017 – we are already at £4.8 billion net inflows for the first seven months of 2025.
CHINA RALLY FAILS TO DRIVE FUND SALES
Like the UK, China enjoyed a strong period on the stock market in the summer and has continued to push higher. The SSE Composite index delivered a 3.7% total return in July and 12.4% in the year to 5 September 2025. Surprisingly, that performance has not led to a wave of UK money going into Chinese funds.
The Investment Association data reveals that China equity funds have seen net outflows from UK retail investors in every month bar two over the past 12 months. Even July 2025 saw a modest net outflow of £1 million despite the rise in Chinese equity markets.
Domestic investors in China have driven the rally in Chinese stocks amid greater liquidity, and lower interest rates on cash leading individuals to seek a better return via equities.
Foreign investors including those in the UK might lack confidence in the region. Recent Chinese economic data has not been supportive of the stock market rally, with retail sales, corporate investment, credit, and activity numbers more representative of a downturn.
So, what could change the situation? There is one factor that unites both the UK and Chinese stock markets – attractive valuations. Both markets are much cheaper than investment hotspots like the US and Germany.
The next time markets experience a sharp pullback, it is fair to suggest certain investors might decide they are no long willing to pay high multiples of earnings, and we see a de-rating in the most expensive parts of the market. In that situation, investors could go on the hunt for cheaper places, and it is clear where two of them lie.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
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