Why did the UK equity market outperform in 2022?

At W1M we have always been global investors. We believe that identifying industry leading companies, regardless of where they are based, gives clients the widest set of investment opportunities and far better diversification within a portfolio. As part of our active management approach, we are benchmark agnostic, so we do not seek to construct our funds/portfolios by aiming to match the regional weightings of the relevant index. But we are a UK-based business, which means that local markets dominate media headlines – the FTSE 100 is talked about more in London than it is elsewhere, as you would expect.

While we do not seek to recreate the components of the MSCI All Country World Index (ACWI), we do consider it to be the fairest performance comparator for our global equity funds, and we also target a level of real returns – that is returns that exceed inflation – over the cycle. In seven out of the last eight years, the MSCI ACWI has outperformed the UK market. 2022 was the exception, with the UK large cap index (MSCIUU) outperforming the world index by around 15%.

There are a number of elements to consider when making a comparison between different markets, these include the quality of the companies that are listed in the country, the size and liquidity of those companies (i.e. can they be bought/sold quickly and easily), and the industries in which they operate. These can be considered relative to other markets or to the global index. The chart below illustrates this. The chart shows each of the 11 MSCI sectors (the bubbles are proportional in size to the weighting of each UK sector within the UK index) and the sectors are plotted according to the relative weight (horizontal) and relative performance in constant currency (vertical) when compared to the world index in 2022.

Figure 1

Data source: MSCI, Factset, Waverton, as at 31.12.22

This shows that Consumer Staples, Energy and Materials stocks are a significantly larger component of the UK market when compared to the global index, and that Information Technology stocks are meaningfully under-represented in the UK versus other international markets. However, you can also see that UK stocks in both Consumer Staples and Energy underperformed the returns delivered by peer group companies listed in other parts of the world.

In other words, the UK equity market outperformed the rest of the world because of its weighting in certain sectors and not so much due to how well UK stocks performed versus international competitors in those sectors. The UK did, however, outperform in a few sectors. Materials is the stand-out example (both overweight and outperforming), a reflection of the UK listing of many of the world’s largest diversified mining companies (e.g. Rio Tinto, BHP, Anglo American) which had a meaningful impact on the performance of the UK market.

The key point here is that around two thirds of the outperformance of the UK came from its sector composition, and only one third from superior stock performance within each sector.

UK investors and their advisers tend to have a home-bias (the same is also true in other regions), and in 2022 that happened to coincide with a macro-economic backdrop that favoured the make-up of the UK market. 

For the UK to consistently outperform the global index we will need to see an economic environment where value cyclical sectors such as Energy, Materials and Financials, continue to lead the market higher. But these are all genuinely global sectors, so stock selection when looked at in a global context can still make a significant difference to clients’ overall investment returns.

To illustrate this point, US and European oil majors meaningfully outperformed those in the UK last year (all in sterling terms). The same is true in the Industrials and Utilities sectors, where the UK’s large weight relative to other regions outweighed the weaker performance of companies in these sectors versus international peers.

We highlight these points to emphasise the advantages to clients of having a global investment perspective focused on identifying industry leaders, and constructing funds/portfolios on the basis of exposures to different industries and style factors (such as growth and value) that take into account the global economic outlook, rather than a focus on regional exposures that overlook the distinct nuances of different regional markets. In order to produce consistently superior real returns over time, stock selection is key.